Economists warn that nearly 200 banks are at risk of runs, failure

Fears that another interest rate hike will hasten more bank failures will loom over the Federal Reserve’s meeting this week after a study found that nearly 200 banks are at risk of the same sort of collapse as the one at Silicon Valley Bank.

The fear is that another rate hike from the Federal Reserve to tamp down inflation will sap the value of banks’ assets such as government bonds and mortgage-backed securities. That would make them vulnerable to a run by depositors — the same way SVB became insolvent.

“The recent declines in bank asset values very significantly increased the fragility of the U.S. banking system to uninsured depositor runs,” said economists at the Social Science Research Network. “Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization.”

The network’s study estimated that 186 banks in the U.S. are vulnerable if just half of their depositors withdraw their funds.

In developments Sunday, banking giant UBS is buying troubled rival Credit Suisse for almost $3.25 billion, in a deal orchestrated by regulators in an effort to avoid further market-shaking turmoil in the global banking system.

And the Federal Reserve and five other central banks announced coordinated steps on Sunday to boost liquidity in their U.S. dollar swap arrangements, starting Monday. The Fed took action with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank. 

Chairman Jerome Powell will announce Wednesday whether the Fed is raising its benchmark rate after eight increases in the past year to combat chronic high inflation. Mr. Powell signaled this month that the Fed might raise rates more than the expected quarter percentage point because inflation isn’t falling fast enough and the labor market remains strong.

That was before the collapses of Silicon Valley Bank and Signature Bank on March 10, the second- and third-largest bank failures in U.S. history. Last week, California’s First Republic Bank received an emergency infusion of $30 billion from 11 of the nation’s largest banks in an aid package brokered by the Biden administration.

The banks’ troubles have been blamed in part on the Fed’s rapid series of rate hikes, which reduced the value of their long-term debt. The banks were unable to fulfill the run of withdrawal demands from depositors seeking higher yields elsewhere.

Bank stocks have taken significant hits. On Wall Street, shares of First Republic Bank dropped 32% on Friday. In Switzerland, shares of troubled lender Credit Suisse dropped 8%.

SVB Financial Group said Friday that it had filed for Chapter 11 bankruptcy protection to seek buyers for its assets. A week earlier, regulators took over its Silicon Valley Bank division.

The company said it has about $2.2 billion of liquidity after ending last year with $209 billion in assets. On March 9, depositors tried to withdraw $42 billion in one day as fears spread that the bank was on shaky financial ground.

Treasury Secretary Janet Yellen, who helped broker that deal and the closure of SVB, told lawmakers Thursday that the overall U.S. banking system “remains sound” and that Americans don’t need to worry about their money in banks. Yet even as she was testifying, big banks were teaming up to prop up First Republic Bank with the $30 billion rescue package.

House Financial Services Committee Chairman Patrick McHenry, North Carolina Republican, and Rep. Maxine Waters of California, the committee’s ranking Democrat, announced Friday the first of “multiple” hearings on the collapses of Silicon Valley Bank and Signature Bank. They said they would question Martin Greunberg, chairman of the Federal Deposit Insurance Corp., and Michael Barr, vice chair of the Federal Reserve, on March 29 and that the committee “is committed to getting to the bottom of the failures of Silicon Valley Bank and Signature Bank,” which have roiled the banking industry and financial markets. 

Despite widespread fears for the banking industry, the Organization for Economic Cooperation and Development said central banks should remain focused on taming high inflation.

The group, which provides policy advice to 37 democracies with market-based economies, said the Fed should raise its benchmark rate to a range of 5.25% to 5.5% from the current 4.5% to 4.75%.

The European Central Bank defied expectations on Thursday by raising its key rate from 2.5% to 3%. The Bank of England will hold a meeting this week to announce a rate decision.

One key measure of inflation in the U.S. did move in the right direction last week. The Producer Price Index, which tracks what producers get paid for goods and services, fell in February to an annual pace of 4.6%, the Labor Department reported. That was a marked improvement from the downwardly revised 5.7% annual rate in January.

Republicans are laying a big part of the blame for the banking problems on the Biden administration.

“The reckless tax-and-spend agenda that was forced through Congress” contributed to record high inflation that the Fed is combating through rising interest rates, said Sen. Mike Crapo, Idaho Republican.

Sen. Tim Scott, South Carolina Republican, told Ms. Yellen that the administration’s “handling of the economy contributed to this.”

“I plan to hold the regulators accountable,” he said.

Sen. Mark R. Warner, Virginia Democrat, asked, “Where were the regulators in all of this?”

President Biden called on Congress to allow regulators to impose stiffer penalties on the executives of failed banks, including clawing back compensation and making it easier to bar them from working in the industry.

Mr. Biden said the FDIC should be able to force executives at a broader range of banks to pay back compensation if their banks fail.

“Strengthening accountability is an important deterrent to prevent mismanagement in the future,” Mr. Biden said in a statement. “Congress must act to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing.”

• This article is based in part on wire-service reports.