Between unrealized losses on Treasury securities caused by rising interest rates and bad commercial real estate loans, bank balance sheets are nowhere near as solid as advertised. From Michael Maharrey at moneymetals.com:
When the Federal Reserve started raising rates, it precipitated a financial crisis. The central bank managed to paper over the problem with a bailout program, but the crisis continues to bubble and percolate under the surface.
According to the latest data from the FDIC, the U.S. banking system is sitting on $517 billion in unrealized losses due to deteriorating bond portfolios.
Unrealized losses triggered the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank in 2023.
According to the FDIC, unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion in the first quarter. That’s an 8.1 percent increase.
It was the ninth straight quarter of “unusually high” unrealized losses corresponding with Fed monetary tightening that started in 2022.
Unrealized losses amount to 9.4 percent of the $5.47 trillion in securities held by commercial banks.
The Unrealized Loss Problem
As interest rates rise, the price of Treasury bonds and mortgage-backed securities fall. The decline in these asset prices has put a dent in bank balance sheets.
WolfStreet offered a good explanation of how banks got into this situation…
“During the pandemic money-printing era, banks, flush with cash from depositors, loaded up on securities to put this cash to work, and they loaded up primarily on longer-term securities because they still had a yield visibly above zero, unlike short-term Treasury bills which were yielding zero or close to zero and sometimes below zero at the time. During that time, banks’ securities holdings soared by $2.5 trillion, or by 57 percent, to $6.2 trillion at the peak in Q1 2022.”
In other words, the Federal Reserve incentivized the bond-buying spree.
With the Fed keeping interest rates artificially low for more than a decade in the wake of the 2008 financial crisis and slamming rates to zero again during the pandemic, most people began to assume that the era of easy money would never end.
Central Bank! I love those who speak the truth.
Several breeds of wild dogs on tonight’s Area Study Sack-N-Save stripmall scavenge and they must’ve found those unwrapped steaks as all tails were wagging and they looked healthy
They let me approach for patting, petting, praising.
[Thank You God & Lady Nature]
Grocery items still off the charts, at least my staples, with some tripling since the Stig Beal.
They try to make a shekel on the cleaning aisle closeout section with barn burner deals and some of that stuff is in the dumpster later.
To be fair the ten mile stripmall Palookaville (h/t-JHK) wasn’t around when they came in during the late 1990’s under actual Rhodes Scholar Slick Willie.
Good ol’ capitalism where I can go a few stoplights down the road and find a better price with hardly any investment in petrol for the tank.
Breaking from The Ocean Blue:
Between Something and Nothing