US Banking System Sits On $517 Billion In Unrealized Losses As Financial Crisis Looms

The U.S. banking system is currently grappling with a staggering $517 billion in unrealized losses due to deteriorating bond portfolios, according to the latest data from the FDIC. These unrealized losses, which have been increasing for nine consecutive quarters, have already triggered the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank in 2023.

The problem stems from the Federal Reserve’s monetary tightening, which began in 2022. As interest rates rise, the price of Treasury bonds and mortgage-backed securities fall, putting a dent in bank balance sheets. During the pandemic era of easy money, banks loaded up on longer-term securities, assuming that the era of low interest rates would never end. However, when inflation surged, the Fed was forced to raise rates, leading to a “colossal misjudgment of future interest rates.”

While some argue that unrealized losses aren’t a big deal unless banks try to sell the bonds, the recent bank failures have shown that these losses can quickly become a serious issue when depositors lose confidence and start withdrawing their money. The Fed’s Bank Term Funding Program (BTFP) helped to paper over the problem by allowing troubled banks to borrow money against their devalued bonds at face value, but the underlying issue remains.

As of April 30, the BTFP still had an outstanding balance of just under $148 billion, and the number of “problem banks” increased from 52 to 63 in the first quarter. With many banks still in a precarious position, it would only take a small blip in the economy to push more banks over the edge, potentially triggering a larger financial crisis.