Recent data from the Federal Reserve shows that more than 700 banks in the US have self-reported that they have suffered massive unrealized losses that currently exceed 50% of their capital. This staggering statistic has caused the Fed to express concern about the safety and soundness of these banks. The Federal Reserve has identified a rising interest rate environment as the main trigger for this wave of losses.
As the interest rate rises, banks with large unrealized losses unfortunately face some tough decisions in their attempts to mitigate the risks associated with their investment portfolios. One of these steps is to switch up their accounting treatment of these securities in order to stop any further losses. Other strategies include hedging interest rate risk and establishing more tangible capital. This all is done in an attempt to try and secure a greater liquidity position and of course, their survival.
The Federal Reserve has indicated that outflows of deposits and limited availability of contingency funding are also causing a severe impediment for these banks. They are being forced to choose between higher-cost wholesale funding or limiting their lending activities. As the Fed has stated this data has been compiled from the third quarter of 2022 so it is expected that things may change drastically when the fourth quarter figures are released.
Ethan Garcia
- 2023-05-13
700+ US Banks Suffer Major Unrealized Losses
Recent data from the Federal Reserve has revealed that 700+ banks have suffered massive unrealized losses that exceed 50% of their capital. Find out how the Federal Reserve is responding and what certain banks are doing in order to combat this issue.
