Serious Problems for the US Banking System – What We Need to Know

The latest data from the Federal Deposit Insurance Corporation (FDIC) shows a worrying trend in the US banking sector, as unrealized losses continue to rise, reaching over $500 billion.

These losses were mainly due to the banks’ exposure to the residential real estate market, where fluctuations in mortgage interest rates affected the value of mortgage-backed securities.

The concept of unrealized losses reflects the discrepancy between the price paid by banks for securities and their current market value. Although banks are not required to immediately correct these losses on their balance sheets, they can present a significant challenge when financial institutions need liquidity.

In the first quarter of this year, unrealized losses on various types of securities, including those designated as available-for-sale and held-to-maturity, increased by $39 billion. This spike was driven in particular by losses on residential mortgage-backed securities, which were impacted by rising mortgage rates during the period.

This marks the ninth straight quarter of increased unrealized losses, a trend that has continued since the Federal Reserve began raising interest rates in 2022.

In addition to unrealized losses, the FDIC has also seen an increase in the number of financial institutions listed as troubled banks. This list includes banks exhibiting financial weakness, operational problems or management challenges, with total assets held by them reaching $82.1 billion.

While the FDIC assures that the US banking system remains stable for now, it warns of potential risks posed by continued inflation, fluctuating market interest rates and geopolitical uncertainty. These factors can lead to credit quality, revenue stability and liquidity management challenges for banks. Therefore, the FDIC emphasizes the importance of continuous monitoring and supervision to effectively address these issues.

Alexander Stefanov