Unrealized losses estimated at over half a trillion USD in the US banking system are once again rising, according to new numbers from the Federal Deposit Insurance Corporation (FDIC).
In its Quarterly Banking Profile report for 2024, the FDIC confirms banks are now holding more than half a trillion dollars in paper losses on their balance sheets.
Residential Real Estate Market
The massive losses are due largely to exposure to the residential real estate market in the United States which has seen devaluation over the last 5 years.
Unrealized losses represent the gap between the price banks paid for securities against the residential real estate market and the current market value of those assets.
Banks can hold securities until they mature without adding the loss to market on their balance sheets, but this can become a tricky scenario if the value is not regained in a timely fashion.
In fact, large unrealized losses in the banking system can become an extreme liability.
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This is especially true when banks need liquidity as the funds represent profit losses.
Banks who are affected by the massive losses can see anywhere from 5 to 15 billion USD in paper losses on their assets.
“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.”
– Federal Deposit Insurance Corporation (FDIC)
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CAMELS
According to the FDIC The number of banks on the Problem Bank List, with a CAMELS composite rating of ‘4’ or ‘5’ increased from 52 in fourth quarter 2023 to 63 in first quarter 2024.
The CAMELS rating system assesses the strength of a bank through six categories. CAMELS is an acronym for capital adequacy, assets, management capability, earnings, liquidity, sensitivity.
The rating system is on a scale of one to five, with one being the best rating and five being the worst rating.
The FDIC confirms the number of problem banks currently represent 1.4% of total banks, which is within the normal range for non-crisis periods of 1% to 2% of all banks.
Although the total assets held by banks in crisis increased from $15.8 billion to $82.1 billion during the quarter, the amount is still not outside the critical range, although approaching concern.
No Imminent Risk
The FDIC has even stated that the health of the US banking system is at no imminent risk, but still warns that persistent inflation, volatile market rates, and geopolitical stability concerns continue to put pressure on the entire industry.
These factors when aggregated could cause credit quality, earnings, and liquidity challenges for the industry.
In addition, FDIC believes deterioration in certain loan portfolios, particularly office properties and credit card loans, continues to warrant industry monitoring.
These financial issues, together with access to funding and margin pressures, will remain matters of ongoing supervisory attention by the FDIC.
The FDIC also confirmed that the total number of lenders on its Problem Bank List rose last quarter.
These 60 plus banks may be on the brink of insolvency due to financial, operational, or managerial weakness or a combination of such issues, the FDIC warns.
Increases in paper losses for more US Banks may trigger a bigger financial industry crisis in North America, possibly causing a recession ripple affect around the world.
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