More Than 700 US Banks Facing ‘Significant Safety and Soundness Risk’ Due to Massive Unrealized Losses: Federal Reserve
The Federal Reserve has recently released data indicating that over 700 American banks are facing significant risks due to massive unrealized losses on their balance sheets. These banks have self-reported unrealized losses that exceed 50% of their capital, which is a concerning trend. The report, which was compiled in February and released on the Federal Reserve’s website, suggests that banks have been taking steps to mitigate the losses for several months.
Some of the measures taken by banks include changing the accounting treatment of their securities, hedging interest rate risk, and retaining more tangible capital. However, despite these actions, the Fed believes that the banks are still facing significant safety and soundness risks.
The Fed attributes the catalyst for these losses to its own interest rate rises. As rates rise, investment portfolios, which have traditionally been a source of liquidity, become further limited. Securities have traditionally been used for liquidity purposes, but the level of unrealized losses that banks are facing is causing them to make difficult choices.
Banks with large unrealized losses face significant safety and soundness risks. Higher than anticipated deposit outflows and limited available contingency funding may cause them to rely on higher-cost wholesale funding or curtail lending. This could lead to further instability in the financial markets.
The rising interest rate environment is increasing financial risks for many banks. The Fed is concerned with banks that have investment portfolios with large unrealized loss positions. The Fed’s report indicates that it is closely monitoring the situation and working with banks to address their concerns. However, it remains to be seen how these banks will cope with the losses and what impact it may have on the broader financial system.