FDIC Unveils Stark Banking Realities

According to new numbers from the Federal Deposit Insurance Corporation (FDIC), unrealized losses in the US banking system are again on the rise. In its Quarterly Banking Profile report, the FDIC reveals that banks now have over half a trillion dollars in paper losses on their balance sheets. This significant figure is mainly due to exposure to the residential real estate market.

Prominent Financial and Economy writer and author Miguel Jimenez began writing about banks' unrealized losses last year. In his March 14, 2023 article about the Silicon Valley Bank collapse entitled "The Specter of Another Financial Crisis Is Haunting the World," he warned of another global economic crisis in the horizon.

"The scene is familiar. A somewhat obscure financial institution goes into crisis. Authorities urge people to stay calm. Central banks step in. Investors seek refuge elsewhere. Stocks fall. Bonds go up. So does gold. It smells, in short, of a financial crisis. The depth of this crisis and how much this episode, marked above all by the collapse of Silicon Valley Bank, will affect the real economy is still unknown. But the effects are already palpable in the markets, in the expectations of new interest rate hikes, and even in the political rhetoric," he wrote. "The echoes of 2008 resonate in the messages that have followed the Silicon Valley Bank (SVB) crisis."

In theory, he added, banks' unrealized losses are only as long as they maintain the securities in their portfolios. However, if they sell them, the losses materialize, which could lead to a global recession.

What Are Unrealized Losses?

Unrealized losses represent the difference between the price banks paid for securities and the current market value of those assets. Although banks can hold bonds until they mature without marking them to market on their balance sheets, these losses can become a severe liability when banks need liquidity.

The FDIC states, "Unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter."

The Driving Factors

The report indicates that higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase.

That marks the ninth quarter of unusually high unrealized losses since the Federal Reserve began raising interest rates in the first quarter of 2022. The continuous rise in mortgage rates has placed additional pressure on the banking sector, exacerbating the already challenging financial landscape.

Problem Banks on the Rise

The FDIC also highlighted a concerning trend: the number of lenders on its Problem Bank List rose last quarter. These banks are on the brink of insolvency due to financial, operational, or managerial weaknesses.

"The number of banks on the Problem Bank List, those with a CAMELS composite rating of '4' or '5' increased from 52 in fourth quarter 2023 to 63 in first quarter 2024," the FDIC notes. This increase represents 1.4% of total banks, which is within the normal range for non-crisis periods of 1% to 2% of all banks.

"The number of problem banks represented 1.4% of total banks, which was within the normal range for non-crisis periods of 1% to 2% of all banks."

Banking System Health and Future Concerns

While the FDIC assures that the health of the US banking system is not at imminent risk, it warns that persistent inflation, volatile market rates, and geopolitical concerns continue to pressure the industry. The total assets held by problem banks increased by $15.8 billion to $82.1 billion during the quarter, adding another layer of complexity to the already precarious situation.

The rise in unrealized losses and the growing number of problem banks paint a challenging picture for the US banking system. As the industry navigates these turbulent times, the FDIC's insights will be crucial for understanding the evolving financial landscape. It remains to be seen and confirmed if a global recession is actually looming.