Working Paper: NBER ID: w31048
Authors: Erica Xuewei Jiang; Gregor Matvos; Tomasz Piskorski; Amit Seru
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.
Keywords: Monetary Policy; Banking Stability; Interest Rates; Uninsured Deposits
JEL Codes: G21; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising interest rates (E43) | declines in asset values (G32) |
| declines in asset values (G32) | self-fulfilling bank runs (E44) |
| rising interest rates (E43) | self-fulfilling bank runs (E44) |
| declines in asset values (G32) | bank stability (G28) |
| high uninsured leverage (G52) | bank fragility (F65) |
| low capital (G31) | bank fragility (F65) |
| bank stability (G28) | risk of insolvency (G33) |