Banks across the United States have $620 billion in “unrealized losses,” assets that have declined in value but have yet to be sold, the head of the Federal Deposit Insurance Corporation warned, four days before Silicon Valley Bank was forced to close.
News of the troubling shortfall came amid the biggest meltdown since Washington Mutual in 2008. As the government scrambles to stave off contagion, the Federal Reserve announced late Sunday that all depositors would get their money back.
However, the disclosure about ‘unrealized losses’ will only serve to raise concerns about the US banking industry.
The time bomb is because US banks bought bonds and Treasuries while interest rates were low, but with interest rates now going up, these bonds have lost value.
When interest rates rise, newly issued bonds start paying higher rates to investors, making older bonds with lower rates less attractive and less valuable.
Most banks and pension funds are affected.
“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies,” said Martin Gruenberg, president of the Federal Deposit Insurance Corporation (FDIC).
Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), said on March 6 that there were $620 billion in “unrealized losses” at US banks.
A woman walks past the Silicon Valley Bank headquarters in Santa Clara, California.
The S&B 500 banking sector index on Friday (above), falling less than 1% after losing 6.6% on Thursday in its biggest one-day loss in more than two years.
Speaking on March 6, at the Institute of International Bankers, he confirmed the $620 billion figure.
“Most banks have a certain amount of unrealized losses on securities,” he said.
The total of these unrealized losses, including available-for-sale or held-to-maturity securities, was approximately $620 billion at the end of 2022.
‘Unrealized losses on securities have significantly reduced the reported equity capital of the banking industry.’
Jens Hagendorff, professor of finance at King’s College London, said CNN that the problem was widespread.
“Many institutions, from central banks, commercial banks and pension funds, have assets that are worth significantly less than what they report on their financial statements,” he said.
‘The resulting losses will be large and will have to be financed somehow. The scale of the problem is starting to cause concern.’
But Luc Plouvier, a senior portfolio manager at Van Lanschot Kempen, a Dutch wealth management firm, told CNN that most US banks would not be affected by the problem.
“(Falling bond prices) is really only a problem in a situation where your balance sheet goes down pretty quickly and you have to sell assets that you normally wouldn’t have to sell,” he said.
Gruenberg’s comments were made four days before Silicon Valley Bank collapsed and was taken over by the federal government.
SVB’s implosion came as a shock: The bank, which mainly serves tech clients and start-ups, is the 16th largest in the United States.
It closed on Friday and investors left in a panic about whether they would get their money back; only the first $250,000 is government insured.
However, on Sunday night, the Federal Reserve announced that all deposits would be protected.
The Silicon Valley Bank New York office is empty in New York on Friday. But after the shutdown, the FDIC said SVB depositors will have full access to their insured deposits no later than Monday morning.
President Joe Biden is pictured with Janet Yellen, the Treasury Secretary.
Hours earlier, Janet Yellen, the Treasury secretary, said there would be no government bailout.
The Federal Reserve statement said no taxpayer money would be involved. The Federal Reserve is not funded by taxpayers. Instead, it is financed directly from its own financial operations, through interest.
The cash will come from a Deposit Guarantee Fund. The DIF is financed with bank commissions and the interest generated by the DIF’s investments in government obligations.
“Any loss from the Deposit Insurance Fund to support uninsured depositors will be recovered through a special assessment of banks, as required by law,” the statement said.
They added that “the Federal Reserve Board announced Sunday that it will make additional funds available to eligible depository institutions to help ensure that banks have the ability to meet the needs of all their depositors.”
Joe Biden on Sunday night reassured those who bank with SVB, but said those “responsible for this mess” must be brought to justice.
“The American people and American businesses can trust that their bank deposits will be there when they need them,” he said.
“I am strongly committed to holding those responsible for this mess fully accountable and to continue our efforts to strengthen supervision and regulation of the largest banks so that we are not in this position again.”