Very interesting operational figures and facts about the state of the US banking system are published in a new report by the Federal Reserve (Fed). They indicate that 722 American banks are in a precarious position.
A Growing Number Report Unrealized Losses that Threaten Capital.
At third quarter end, 722 banks reported unrealized losses exceeding 50% of capital:
- 31 of these banks report negative tangible equity levels
- Banks reporting negative tangible equity are currently not able to borrow new money from Federal Home Loan Banks and may lose the ability to sell loans to Government Sponsored Enterprises
- Some banks are taking actions to shelter further market losses
- The decisioning around such actions is complex, particularly at smaller banks where securities have always been used for liquidity purposes and expertise with hedging is limited
Banks with large unrealized losses face significant safety and soundness risks.
Today, the level of unrealized losses are causing some banks to face tough choices:
- Liquidity concerns
- Banks with higher levels of unrealized loss are funding loan growth and deposit withdrawal with other, more highly liquid assets and borrowings
- As a result, many banks need to build and diversify contingent liquidity sources
- Banks may need to curtail future lending activity due to limited funding options
- Earnings and Capital concerns
- Banks will face difficulty in liquidating securities without realizing losses
- Holding securities with below-market yields while funding costs increase negatively impacts net interest margins
- Banks may need to sacrifice earnings to maintain liquidity BOG-FRS - Public Release
…Experts in the United States have already opened a discussion on the topic “What Banks Have Failed In 2023”.
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