Hidden, unrealized losses sometimes become panic-inducing, realized losses. From Paul Kupiec at zerohedge.com:
The Secretary of the Treasury and the Financial Stability Oversight Council would like you to believe that climate-change and unregulated non-bank financial institutions are the biggest threats to financial stability. If financial regulators were actually safeguarding the integrity of banks and financial markets, they would recognize, and do something about, the largest immediate threat to financial stability: the nearly $1.3 trillion of unrealized interest rate related losses in the regulated banking system. This is the real systemic risk today.
The $1.3 trillion is my estimate of the banking system’s total unrealized interest rate related losses as of June 30, 2023. Using bank regulatory data, I estimate that the banking system has total unrealized losses of about $548 billion on bank-owned securities and about $726 billion in interest rate driven losses on bank loan and lease portfolios.
These losses are important because they are not recognized in the value of banks’ reported regulatory capital. Regulatory capital is the buffer that is supposed to keep banks from failing and imposing losses on the FDIC insurance fund. Banks’ need sufficient capital to keep their incentives properly aligned. When banks have little capital their shareholders keep gains generated by their risky investments but off load losses to the FDIC when their risky investments sour.
