“Problem” Banks and Increasing “Unrealized Losses” — Evening Brief – 06.10.24
The Federal Deposit Insurance Corporation’s (FDIC) Quarterly Banking Profile, released last week, highlighted some of the progress that has been made since the mini-banking crisis in March 2023, while also outlining some of the ongoing challenges.
The headline numbers are indeed remarkable, as the 4,568 commercial banks insured by the FDIC reported total net income of $64.2 billion in the first quarter, up 79.5% over the previous quarter.
While overall commercial bank deposits remain below the all-time high of $18.2 trillion set in April 2022, they have been slowly increasing since the failures of Silicon Valley Bank and Signature Bank, reaching approximately $17.6 trillion.
Deposits at large commercial banks totaled $10.84 trillion in April 2023. Comparatively, deposits at small domestic chartered commercial banks have reached a record high of $5.402 trillion.
However, the banking sector is still dealing with growing unrealized losses and many “problem” banks, according to the report.
“Unrealized losses” on available-for-sale and held-to-maturity securities held by banks rose by $39 billion, or 8.1%, from the fourth quarter of 2023 to a total loss of $517 billion, owing primarily to exposure to the residential real estate market. These unrealized losses account for 9.4% of the $5.47 trillion in securities held by those banks.
This was the ninth consecutive quarter of “unusually high unrealized losses” since the Federal Reserve started raising interest rates in March 2022, according to the report.
Although banks can retain securities until maturity without marking them to market on their balance sheets, unrealized losses can become a significant burden when they require liquidity.
The FDIC report also revealed that the number of problem banks was 63 in the first quarter, up from 52 in the fourth quarter of 2023, 1.4% of all U.S. banks, “which was within the normal range for non-crisis periods of one or two percent of all banks,” the FDIC noted.
These banks appeared on the “Problem Bank List” because they contained a CAMELS (Capital adequacy, Assets, Management capability, Earnings, Liquidity, Sensitivity) composite rating of “4” or “5.” CAMELS is the FDIC’s 1-5 rating system, which assesses a financial institution’s performance, risk management practices, and degree of supervisory concern.
Despite the banking system’s “resilience” in the first three months of 2024, the FDIC warned that the finance industry “still faces significant downside risks” from high inflation, geopolitical uncertainty, and volatility in market interest rates.
“These issues could cause credit quality, earnings, and liquidity challenges for the industry,” the report stated. “In addition, deterioration in certain loan portfolios, particularly office properties and credit card loans, continues to warrant monitoring.”