The latest data from the Federal Deposit Insurance Corporation, the FDIC reveals an alarming increase in unrealized losses within the US banking system.
Buy high, sell low
According to the FDIC’s Quarterly Banking Profile, banks are now facing over half a trillion dollars in paper losses, primarily due to their exposure to the weak residential real estate market.
These unrealized losses reflect the difference between the purchase price of assets and their current market value, which difference now is huge, and while banks can hold these securities until maturity without adjusting their market value on balance sheets, these losses pose significant risks when liquidity is needed.
In the first quarter, unrealized losses on available-for-sale and held-to-maturity securities surged by $39 billion, reaching a total of $517 billion.
This increase was driven by higher mortgage rates impacting residential mortgage-backed securities.
This marks the ninth consecutive quarter of high unrealized losses since the Federal Reserve began raising interest rates in early 2022.
On the bad list
The FDIC also reported a rise in the number of banks on its Problem Bank List, which includes institutions on the brink of insolvency due to financial, operational, or managerial weaknesses.
The list expanded from 52 banks in the fourth quarter of 2023 to 63 in the first quarter of 2024.
These problem banks now constitute 1.4% of all banks, a figure within the typical range of 1% to 2% seen during non-crisis periods, so this is kind of normal.
The total assets held by these banks increased by $15.8 billion, reaching $82.1 billion for the quarter.
Hard times coming?
While the FDIC assures that the overall health of the US banking system isn’t immediately at risk, it cautions that persistent inflation, fluctuating market rates, and current geopolitical tensions continue to pressure the industry.
These factors could lead to problems in credit quality, earnings, and liquidity, and the FDIC specifically notes that deterioration in certain loan portfolios, especially those related to office properties and credit card loans, remains a concern.
These issues, along with funding and margin pressures, will continue to be closely monitored by the FDIC.
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