(OPINION) For the first time in over a decade, the banking industry is in crisis. Silicon Valley Bank and Signature Bank have been shut down by regulatory authorities. Credit Suisse has been acquired in an emergency rescue brokered by the Swiss government.

According to Vice, Eleven banks infused $30 billion into First Republic in order to hold off the effects of fleeing depositors, and regional bank PacWest needed to obtain a billion-plus dollars of its own to hold the fort there.

The question is whether the crisis is ending or beginning. Many of the financial sector’s own leaders believe—or at least claim to believe—that the crisis will fade. Citi’s CEO, Jane Fraser, said Wednesday that while mobile banking has dramatically increased the speed at which bank runs can occur, the core issues were limited to a “few banks” that had “some problems.”


But a group of financial researchers out of Stanford, Columbia, Northwestern, and USC believe more banks may be at risk than that—and in fact that something like one in 10 U.S. banks have either more unrecognized losses or are less well-capitalized than SVB.

To the researchers, the sudden loss of confidence in the global banking system was not entirely surprising. When the SVB news hit, the group was already in the process of trying to discern the impact of rising interest rates on the overall health of the banking sector. The answer they discovered in their analysis felt significant well before the banking crisis became national news.

“We had been saying that there’s a flight risk” from uninsured depositors, said Amit Seru, a finance professor at Stanford’s business school and one of the researchers. “It didn’t resonate much, as you can imagine. Probably needed a couple of bank runs for people to pay attention.”

While the particulars vary from bank to bank, the fundamental issue facing the industry right now is this: Before inflation became an international issue, many banks received a large increase in deposits from flush customers. With that money, many banks invested in long-term, illiquid bonds and securities, which at the time were seen as relatively safe.

The issues started last year, once the Federal Reserve decided to tackle rising prices by raising interest rates, which made long-term bonds and securities rapidly decline in value. If depositors get nervous about that and start to pull money, like they did at the handful of troubled banks so far, the bank would need to offload the securities at a loss. “That’s the Catch-22 here,” said Seru.

The question was how far the value of banks’ assets had dropped. According to Seru and the rest of his team’s analysis, the answer was $2 trillion lower than the stated book value. Another way of putting it is that the assessed current value (known as “marked-to-market”) of assets across all banks had dropped 10 percent.

In retrospect, it’s no surprise that SVB was the first domino to fall. The bank had a bad combination of both uninsured deposits and unrealized losses from bad bond bets. But the researchers also wanted to better understand how vulnerable the broader banking system was.

To do so, they analyzed how many banks were at risk of not being able to pay back depositors and, as a result, at risk of a rational bank run—in which customers have a valid reason to believe at least some of their deposits are not safe—if uninsured depositors pulled half their money.


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