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  • Writer's pictureBrandon Zemp

$517 Billion in Unrealized Losses Jolt US Banking System - FDIC Notes 63 Lenders on Brink of Insolvency

$517 Billion in Unrealized Losses Jolt US Banking System - FDIC Notes 63 Lenders on Brink of Insolvency

New figures from the Federal Deposit Insurance Corporation (FDIC) show that unrealized losses in the US banking sector are increasing once more. According to the FDIC's Quarterly Banking Profile report, banks are currently facing over $500 billion in unrealized losses on their balance sheets, primarily stemming from their involvement in the residential real estate market.

Unrealized losses occur when there is a variance between the purchase price of securities by banks and their current market value. While banks have the option to retain securities until maturity without reflecting their market value on their balance sheets, unrealized losses may pose a significant risk if banks require immediate liquidity.

“Unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in the first quarter. Higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase. This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022.”

According to the FDIC, the number of lenders listed on its Problem Bank List increased in the last quarter. These banks are considered to be at risk of insolvency because of financial, operational, or managerial weaknesses, or a combination of these issues.

“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 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. Total assets held by problem banks increased $15.8 billion to $82.1 billion during the quarter.”

Although the FDIC reassures that the US banking system is not facing any immediate threats, it cautions that ongoing inflation, fluctuating market rates, and geopolitical issues are still exerting pressure on the industry.

“These issues could cause credit quality, earnings, and liquidity challenges for the industry. In addition, deterioration in certain loan portfolios, particularly office properties and credit card loans, continues to warrant monitoring. These issues, together with funding and margin pressures, will remain matters of ongoing supervisory attention by the FDIC.”

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