Unrealized losses in the American banking system are increasingly threatening

Calin Rechea
English Section / 6 decembrie 2023

Unrealized losses in the American banking system are increasingly threatening

Versiunea în limba română

Calin Rechea

Keeping interest rates at a high level, which was once not considered high at all, caused a further increase in unrealized losses in the government bond and mortgage portfolios of commercial banks in the United States.

Data for the third quarter of 2023 from the Federal Deposit Insurance Corporation (FDIC), the federal agency that guarantees bank deposits, shows losses of $683.9 billion, very close to the record for the same period in 2022 of $689 billion .9 billion (see chart 1).

Unrealized losses in the American banking system are increasingly threatening

Unrealized losses in held-to-maturity bond portfolios rose $80.9 billion from the previous quarter to a new record of $390.5 billion, while similar losses in held-for-trading bond portfolios rose by 44.6 billion, up to 293.5 billion dollars.

An analysis from Zerohedge shows that the total unrealized loss record was not exceeded because it reflects the takeover of three banks by the FDIC in the first part of the year, which led to the sale of assets and the deletion of unrealized losses from the balance sheets.

Although these are only accounting losses, which will be eliminated once the bonds reach maturity and their collection at nominal value, they have a significant influence on the decrease in bank liquidity.

Moreover, in a liquidity crisis generated, for example, by the flight of deposits, as was the case of Silicon Valley Bank, banks could be forced to sell including bonds from the portfolios included in the held-to-maturity category, which leads to the transformation unrealized losses into realized losses.

In addition to the unrealized losses of commercial banks, the Federal Reserve is also facing massive losses amid rising interest rates (see chart 2).

Unrealized losses in the American banking system are increasingly threatening

They have increased six times since the beginning of the year, up to about 122 billion dollars, and are registered as "deferred assets" in the balance sheet of the American central bank.

In order to prevent liquidity crises and forced bond sales in the banking system, the Federal Reserve credits commercial banks both through the classic facility known as the "discount window" and through the Bank Term Funding Program (BTFP), which was released in March 2023.

The first loans made to banks under the BTFP program, worth about $12 billion, appeared on the Federal Reserve's balance sheet in the week ending March 15, 2023. The latest data, from late last month, show a net balance of about $114 billion of dollars for this refinancing program offered to US financial institutions (see chart 3).

Unrealized losses in the American banking system are increasingly threatening

The total value of credits granted to commercial banks to alleviate the liquidity crisis rose to a record of 164.8 billion dollars in the week ending March 15, 2023, while the amounts granted under the "discount window" facility were 152 .9 billion, well above the record of 111 billion, recorded during the acute period of the global financial crisis, in October 2008.

The much more favorable conditions within the BTFP, where the bonds from the banks' portfolios are accepted as collateral at their nominal value, led to a sharp decrease in the "discount window" loans, which recently reached only 2.2 billion dollars. The loans granted under the BTFP can be repaid at any time and there are no commissions related to these refinancing operations.

The record for refinancing in the US banking system during the global financial crisis is now surpassed only by refinancing under the BTFP program, which the Federal Reserve says "provides loans of up to one year to banks, savings associations, credit unions and other institutions that accepts deposits, in exchange for guarantees accepted as collateral in the market operations of the Federal Reserve".

"The BTFP program will be an additional source of liquidity in exchange for guarantees represented by high-quality securities, eliminating the need for an institution to quickly sell these securities in times of crisis", it is also stated on the website of the American central bank.

In the analysis presented by Zerohedge, it is emphasized that "the Fed did nothing but hide the financial crisis through this rescue program", while "it did not address the fundamental problem, namely the impact of the interest rate increase on an economy and a financial system that have become dependent on cheap money".

Applications for lending under the BTFP program can be made until March 11, 2024, but the continuation of the trend of accelerated growth of unrealized losses on banks' balance sheets will almost certainly cause the Federal Reserve to extend the liquidity facility so that a financial crisis is avoided at least until the presidential elections next fall.

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