Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?

We develop an empirical methodology and conceptual framework to analyze the effect of rising interest rates on the value of U.S. bank assets and bank stability. We mark-to-market losses on banks’ assets due to interest rate increases from Q1 2022 to Q1 2023. Asset values declined on average by 10%, and the $2.2 trillion aggregate decline was on the order of aggregate bank capital. We present a model of solvency runs, which illustrates that interest rate increases can lead to self-fulfilling solvency bank runs even when banks’ assets are fully liquid. The model identifies banks with asset losses, low capital, and critically, high uninsured leverage as being most fragile. A case study of the recently failed Silicon Valley Bank (SVB) confirms the model insights. 10 percent of banks have larger unrecognized losses and lower capital than SVB. On the other hand, SVB had a disproportional share of uninsured funding: only 1 percent of banks had higher uninsured leverage. Combined, losses and uninsured leverage provided incentives for an SVB uninsured depositor run. We compute new empirical measures of bank fragility for the sample of all U.S. banks. Even if only half of uninsured depositors had decided to withdraw, almost 190 banks with assets of $300 billion are at a potential risk of insolvency, meaning that the mark-to-market value of their remaining assets after these withdrawals would be insufficient to repay all insured deposits. We briefly discuss events and subsequent research following our paper’s release on March 13, 2023. We see these as providing validity to our approach and findings.