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

37 Pages Posted: 24 Mar 2023 Last revised: 29 Sep 2023

See all articles by Erica Xuewei Jiang

Erica Xuewei Jiang

University of Southern California

Gregor Matvos

Northwestern University - Kellogg School of Management

Tomasz Piskorski

Columbia University - Columbia Business School, Finance

Amit Seru

Stanford University

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Date Written: March 13, 2023

Abstract

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.

Keywords: Monetary Tightening, Uninsured Depositors, Solvency Runs

JEL Classification: G2, L5

Suggested Citation

Jiang, Erica Xuewei and Matvos, Gregor and Piskorski, Tomasz and Seru, Amit, Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs? (March 13, 2023). Available at SSRN: https://ssrn.com/abstract=4387676 or http://dx.doi.org/10.2139/ssrn.4387676

Erica Xuewei Jiang

University of Southern California ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Gregor Matvos

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Tomasz Piskorski

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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