Why has the interest rate hikes caused midsized banks to fail (3 so far) in the US but NOT small banks? Note: I know why the banks failed just why the reasons don’t seem to affect smaller banks!
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These banks tended to have larger-than-average deposit size and a less diversified business model, as well as weaker risk management practices. They also bought bonds at a time when interest rates were lower. When interest rates began climbing last year, the value of their bonds declined. Because banks must state the value of their bond as they would sell in the current market (called mark to market accounting). This makes the bank’s balance sheet look bad. When that happens, many customers who have deposits greater than the $250,000 insured by the FDIC start withdrawing their money from the bank, which is called a bank run. That can lead to a bank collapsing.
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