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Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs?

Author

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  • Jiang, Erica Xuewei
  • Matvos, Gregor
  • Piskorski, Tomasz
  • Seru, Amit

Abstract

We develop a conceptual framework and an empirical methodology to analyze the effect of rising interest rates on the value of U.S. bank assets and bank stability. We mark-to-market the value of banks’ assets due to interest rate increases from Q1 2022 to Q1 2023, revealing an average decline of 10 %, totaling about $2 trillion in aggregate. We present a model illustrating how asset value declines due to higher rates can lead to self-fulfilling solvency runs even when banks’ assets are fully liquid. Banks with high asset losses, low capital, and, critically, high uninsured leverage are most fragile. A case study of the failed Silicon Valley Bank confirms the model insights. Our empirical measures of bank fragility suggest that, in the absence of regulatory intervention, many U.S. banks would have been at risk of self-fulfilling solvency runs.

Suggested Citation

  • Jiang, Erica Xuewei & Matvos, Gregor & Piskorski, Tomasz & Seru, Amit, 2024. "Monetary tightening and U.S. bank fragility in 2023: Mark-to-market losses and uninsured depositor runs?," Journal of Financial Economics, Elsevier, vol. 159(C).
    • Handle: RePEc:eee:jfinec:v:159:y:2024:i:c:s0304405x24001223
    DOI: 10.1016/j.jfineco.2024.103899
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    Cited by:

    1. Manuel Amador & Javier Bianchi, 2024. "Bank Runs, Fragility, and Regulation," Working Papers 804, Federal Reserve Bank of Minneapolis.
    2. Sarmiento Paipilla, Miguel, 2024. "The Transmission of Non-Banking Liquidity Shocks to the Banking Sector," Discussion Paper 2024-011, Tilburg University, Center for Economic Research.
    3. Jianglin Dennis Ding & George G. Pennacchi, 2024. "The effects of social media use by bank depositors," Annals of Finance, Springer, vol. 20(3), pages 289-300, September.
    4. David P. Glancy & Felicia Ionescu & Elizabeth C. Klee & Antonis Kotidis & Michael Siemer & Andrei Zlate, 2024. "The 2023 Banking Turmoil and the Bank Term Funding Program," Finance and Economics Discussion Series 2024-045, Board of Governors of the Federal Reserve System (U.S.).
    5. Wifo, 2023. "WIFO-Monatsberichte, Heft 4/2023," WIFO Monatsberichte (monthly reports), WIFO, vol. 96(4), April.
    6. Giampaolo Bonomi & Ali Uppal, 2023. "Kites and Quails: Monetary Policy and Communication with Strategic Financial Markets," Papers 2305.08958, arXiv.org, revised May 2024.
    7. Koont, Naz & Santos, Tano & Zingales, Luigi, 2023. "Destabilizing digital "bank walks"," Working Papers 328, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    8. Marco Cipriani & Thomas M. Eisenbach & Anna Kovner, 2024. "Tracing Bank Runs in Real Time," Working Paper 24-10, Federal Reserve Bank of Richmond.
    9. Thomas Url, 2023. "Hohe Inflation führt zu Kurswechsel in der Geldpolitik," WIFO Monatsberichte (monthly reports), WIFO, vol. 96(4), pages 269-281, April.
    10. Lyócsa, Štefan & Halousková, Martina & Haugom, Erik, 2023. "The US banking crisis in 2023: Intraday attention and price variation of banks at risk," Finance Research Letters, Elsevier, vol. 57(C).
    11. D’Ercole, Francesco & Wagner, Alexander F., 2023. "The green energy transition and the 2023 Banking Crisis," Finance Research Letters, Elsevier, vol. 58(PC).
    12. Raymond Kim, 2024. "Hedging securities and Silicon Valley Bank idiosyncrasies," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(4), pages 653-672, April.
    13. Axelle Arquié, 2023. "Fire Sales and Bank Runs in the Presence of a Saving Allocation by Depositors," Working Papers 2023-09, CEPII research center.
    14. Citterio, Alberto, 2024. "Bank failure prediction models: Review and outlook," Socio-Economic Planning Sciences, Elsevier, vol. 92(C).
    15. Maximilian Grimm, 2024. "The Effect of Monetary Policy on Systemic Bank Funding Stability," ECONtribute Discussion Papers Series 341, University of Bonn and University of Cologne, Germany.
    16. Sergio A. Correia & Stephan Luck & Emil Verner, 2024. "Failing Banks," Staff Reports 1117, Federal Reserve Bank of New York.

    More about this item

    Keywords

    Monetary tightening; Uninsured depositors; Solvency Runs;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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