Ticking Time Bomb? US Banks Sitting On $620 Billion Losses, Reveals Head Of US Govt Agency FDIC

Just 48 hours. That's all it took for the US' 16th largest bank, the Silicon Valley Bank, to collapse last week.

Back To Back Collapse Of US Banks

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The bank's collapse sent tingles of panic down investors¡¯ spines as it highlighted a larger problem across the banking sector. But that was not all. Soon after the US witnessed its second biggest banking collapse since the 2008 crisis, another one came when Signature Bank collapsed after SVB.

SVB¡¯s downfall was tied, in part, to the plunge in the value of bonds it acquired during boom times, when it had a lot of customer deposits coming in and needed somewhere to park the cash.

But SVB isn¡¯t the only financial institution with that issue.

Also Read: Hindenburg Trolled For Failing To Detect SVB Crisis

US Banks Sitting On $620 Billion Losses

US banks have been sitting on $620 billion in unrealized losses (assets that have decreased in price but haven¡¯t been sold yet) at the end of 2022, according to the US govt agency FDIC (Federal Deposit Insurance Corporation).

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But how has it been happening? Simply put, back when interest rates were near zero, US banks scooped up lots of Treasuries and bonds. Now, as the US' central bank, i.e., the Federal Reserve, hikes rates to fight inflation, those bonds have declined in value.

When interest rates rise, newly issued bonds start paying higher rates to investors, which makes the older bonds with lower rates less attractive and less valuable. The result is that most banks have some amount of unrealized loss on their books.

¡°The current interest rate environment has had dramatic effects on the profitability and risk profile of banks¡¯ funding and investment strategies,¡± said FDIC Chairman Martin Gruenberg in prepared remarks at the Institute of International Bankers last week, as per CNN report.

¡°Unrealized losses weaken a bank¡¯s future ability to meet unexpected liquidity needs,¡± he added.

In other words, banks might find they have less cash on hand than they thought ¡ª especially when they need it ¡ª because their securities are worth less than they expected.

Also Read: Why US Banking Giant Goldman Sachs Is On The Hunt To Invest Millions In Crypto

No Need To Panic Yet?

Still, there¡¯s no need to panic yet, say analysts, as per the report,

¡°[Falling bond prices are] only really a problem in a situation where your balance sheet is sinking quite quickly¡­ [and you] have to sell assets that you wouldn¡¯t ordinarily have to sell,¡± said Luc Plouvier, senior portfolio manager at Van Lanschot Kempen, a Dutch wealth management firm.

Most large US banks are reportedly in good financial condition and won¡¯t find themselves in a situation where they¡¯re forced to realize bond losses. Shares of some of the larger banks went on to stabilise last Friday after plunging to their worst day in nearly three years on Thursday amid SVB's sudden collapse.

Now it remains to be seen whether US banks are able to further handle this situation and come out strong enough, or whether some more bank collapses are perhaps next in line.

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