700+ US Banks on the Brink: Massive Unrealized Losses Pose Grave Risk, Federal Reserve Data Reveals
Over 700 American banks are at significant risk due to massive unrealized losses on their balance sheets, caused by rising interest rates, according to data from the Federal Reserve.
Over 700 American banks are grappling with a "significant safety and soundness risk" as they face massive unrealized losses on their balance sheets, according to recently released data from the Federal Reserve. These banks have self-reported unrealized losses exceeding 50% of their capital, prompting them to take various measures to mitigate further losses, such as altering the accounting treatment of their securities, hedging interest rate risk, and retaining more tangible capital.
The Fed attributes the losses to its own interest rate increases, which have had a ripple effect on bank portfolios. The mounting financial risks resulting from the rising interest rate environment have left banks with difficult choices to make, as they grapple with limited liquidity options due to the substantial unrealized losses on their investment portfolios. This predicament may force some banks to rely on higher-cost wholesale funding or reduce lending, posing challenges to their stability and operations.
The Fed's analysis, based on data compiled up to the third quarter of 2022, highlights the precarious situation faced by these banks and raises concerns about their overall safety and soundness in the face of ongoing financial risks.
