Banks’ Unrealized Losses Spike by $39 Billion in Q1 – What Happens Next Will Shock You!

In New York City, New York, commercial banks are facing a concerning increase in unrealized losses on securities. In the first quarter of 2024, these losses went up by $39 billion, resulting in a cumulative loss of $517 billion. This represents 9.4% of the $5.47 trillion in securities held by these banks, as reported by the FDIC’s quarterly bank data for Q1.

Most of these securities consist of Treasury securities and government-guaranteed MBS that do not incur credit losses. However, their market value has dropped due to rising interest rates. These securities will pay face value upon maturity, but until then, the higher yields lead to lower prices.

The unrealized losses are categorized under two methods: Held to Maturity (HTM) and Available for Sale (AFS). HTM securities witnessed a $31 billion increase in unrealized losses, reaching a total of $305 billion, while AFS securities saw an $8 billion rise to $211 billion.

Despite the recent relief from rate cuts that temporarily alleviated the situation, the pain is far from over for these banks. Yields on longer-term securities experienced a significant drop during a period known as the Rate-Cut Mania but started to rise again towards the end of Q1.

Banks accumulated a substantial amount of securities during the pandemic era, which has now proven to be a misjudgment in anticipation of future interest rates. The mismanagement led to the collapse of several banks in the spring of 2023 as depositors withdrew their funds.

It is crucial to note that while unrealized losses may not initially seem alarming, they can have severe repercussions, such as bank collapses. The value of securities held by banks has fluctuated over the quarters, with HTM securities decreasing steadily and AFS securities showing a recent upward trend.

Interest rate risk remains a significant concern for banks, especially concerning the security or loan term. The FDIC has provided data indicating that the risk increases with the term of the asset. This data highlights the potential vulnerabilities faced by banks in the current economic climate.