BREAKING: Banks Grapple with Over Half a TRILLION in Paper Losses

In a financial landscape rocked by fluctuating interest rates, U.S. banks are currently holding an estimated $515 billion in unrealized losses on their investment securities.

Gee, do you think that could be a problem?

Here’s what it looks like visually — and that is one heck of a nasty chart:

BREAKING 🚨: U.S. banks are now grappling with a whopping $515 billion in unrealized losses.

To put it into perspective, that's over 8x higher than during the 2008 financial crisis.

Probably nothing. 😬 pic.twitter.com/FjdLDh6iAI

— Jacob King (@JacobKinge) November 25, 2024

Remember how bad 2008 was?

Now look at 2008 on that chart and it’s only a small BLIP compared to what we face right now.

But what does this mean for the average person, and why should we care? Let’s break it down in layman’s terms…

The Unrealized Losses Phenomenon:

Imagine you bought a bond when interest rates were low. Now, fast forward to today, where interest rates have climbed steeply due to efforts to combat inflation. Your bond, which pays a fixed rate, is now less attractive because newer bonds offer higher returns. If you were to sell your bond today, you’d have to do so at a lower price than what you paid, reflecting this drop in value due to higher market rates. This difference between what you paid and what it’s worth now is what we call an ‘unrealized loss’.

Why It’s Happening:

Interest Rate Hikes: The Federal Reserve has been raising interest rates to tackle inflation, which has inversely impacted the value of existing fixed-income securities like bonds. When rates go up, the price of bonds goes down.
Bank Investments: During times of low interest rates, like during the initial stages of the pandemic, banks invested heavily in long-term bonds, expecting to earn a steady return. However, with the Fed’s rate hikes, these investments are now worth less on paper.

The Big Picture:

Not Immediate Cash Losses: These are ‘paper losses’ because banks don’t realize these losses unless they sell the bonds before maturity. If held to maturity, the banks will still get back the full amount, minus interest paid out over time.
Potential Impact: While banks aren’t in immediate danger, these unrealized losses can affect their capital ratios, potentially influencing their ability to lend or forcing them to seek other funding if depositors start withdrawing money en masse.

Regulatory Concerns: The FDIC and other financial watchdogs keep a close eye on these figures. A significant increase in withdrawals could force banks to sell assets at a loss, turning unrealized losses into realized ones, which could strain their financial health.

Here’s more on the story, from Forbes:

Driven by the Federal Reserve’s aggressive interest rate hikes, banks faced a staggering $515 billion in unrealized losses on investment securities, according to the latest quarterly report from the Federal Deposit Insurance Corporation. While the figure is daunting, it’s a slight reprieve compared to previous quarters, when losses soared beyond $600 billion.

To contextualize this setback, consider the pre-2022 era of stability. Banks consistently reported average quarterly unrealized gains of $20 billion from 2008 to 2021. However, a significant shift occurred when the Fed initiated a series of interest rate hikes to combat inflation. Higher interest rates caused the value of bonds and other fixed income assets held by banks, which were issued during a long period where interest rates hovered near zero, to plummet.

Unrealized losses on investment securities once again topped half a trillion last quarter.FDIC
These losses reverberated throughout the industry, leading in part to the demise of institutions like First Republic, Signature Bank and Silicon Valley Bank. Already, there have been more bank failures in 2023 than in any year since 2020, according to FDIC data.

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I keep as little as possible in the banks.

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