$684,000,000,000 in Unrealized Losses Hammer US Banks As Fed Reveals Surge in Underwater Assets


US banks are now saddled with a staggering $684 billion in losses on securities, according to a new report from the Federal Deposit Insurance Corporation (FDIC).

The agency says the total number of unrealized securities in the banking system at the end of Q3 surged by $126 billion – a 22.5% increase in the span of a few months.

Unrealized losses represent the difference between the price banks paid for bonds and the current value of those securities on the open market.

Although banks can simply hold their bonds until they mature, they can become an extreme liability when banks need injection of liquidity.

Source: FDIC

The dangers of unrealized losses came into focus early this year amid the collapse of Silicon Valley Bank.

The bank’s sudden failure back in March was sparked by an announcement that it had booked a $1.8 billion loss from selling a portion of its underwater bond portfolio.

Those losses stem from a historic collapse in bonds amid the Fed’s push to keep interest rates higher for longer.

In response to the failures of SVB and Signature bank, the Federal Reserve launched the Bank Term Funding Program (BTFP), which offers one-year emergency funding to banks in distress.

The FDIC says the banking industry’s profits margins have remained remarkably resilient, although deposit flight continues.

“In the third quarter, domestic deposits declined for the sixth consecutive quarter, though the outflow of deposits continued to moderate from the large outflows experienced in the first quarter. The level of liquid assets fell in the third quarter due to a reduction in securities portfolios…

Though the U.S. economy has remained strong in 2023, the banking industry still faces significant downside risks from the continued effects of inflation, rising market interest rates, and geopolitical uncertainty. These issues could cause credit quality, earnings, and liquidity challenges for the industry.”

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