US banks at the moment are saddled with a staggering $684 billion in losses on securities, in response to a brand new report from the Federal Deposit Insurance coverage Company (FDIC).
The company says the full variety of unrealized securities within the banking system on the finish of Q3 surged by $126 billion – a 22.5% improve within the span of some months.
Unrealized losses characterize the distinction between the worth banks paid for bonds and the present worth of these securities on the open market.
Though banks can merely maintain their bonds till they mature, they'll turn out to be an excessive legal responsibility when banks want injection of liquidity.
The hazards of unrealized losses got here into focus early this yr amid the collapse of Silicon Valley Financial institution.
The financial institution’s sudden failure again in March was sparked by an announcement that it had booked a $1.8 billion loss from promoting a portion of its underwater bond portfolio.
These losses stem from a historic collapse in bonds amid the Fed’s push to maintain rates of interest larger for longer.
In response to the failures of SVB and Signature financial institution, the Federal Reserve launched the Financial institution Time period Funding Program (BTFP), which gives one-year emergency funding to banks in misery.
The FDIC says the banking trade’s earnings margins have remained remarkably resilient, though deposit flight continues.
“Within the third quarter, home deposits declined for the sixth consecutive quarter, although the outflow of deposits continued to reasonable from the big outflows skilled within the first quarter. The extent of liquid property fell within the third quarter on account of a discount in securities portfolios…
Although the U.S. economic system has remained sturdy in 2023, the banking trade nonetheless faces vital draw back dangers from the continued results of inflation, rising market rates of interest, and geopolitical uncertainty. These points might trigger credit score high quality, earnings, and liquidity challenges for the trade.”
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