Withdrawals from the US banking system are once again on the rise, according to the latest data from the Federal Reserve Economic Data (FRED) system. In just seven days, total deposits in all commercial banks decreased by $133.163 billion, dropping from $17.580 trillion on April 10th to $17.446 trillion on April 17th. These new figures have wiped out the gains made by banks earlier this year, and total deposits remain below the industry’s record high of $18.205 trillion, which was reached just before last year’s banking crisis.

Against the backdrop of another bank failure last week, the industry as a whole continues to face challenges such as high interest rates from the Federal Reserve, unrealized losses on US bonds, competition from money market funds, and concerns about exposure to commercial real estate. Former Kansas Federal Reserve President, Thomas Hoenig, has warned in a recent interview that 722 US banks are still at risk of failure due to substantial unrealized losses.

Hoenig explains, “I think these banks are very vulnerable to the fact that we still have interest rates that are much higher than they were when a lot of these loans were made.” He highlights that the policy rate, the Fed funds rate, was close to zero when many of these loans were issued, but it is now almost 5.5%. This change in interest rates has not been reflected in the unrealized losses across the loan and investment portfolio.

Hoenig also mentions the losses suffered by regional banks last year, which were primarily related to credit risk-free government and government-guaranteed assets. These banks did not have to mark down the value of these assets at the time because they were considered “hold to maturity” or “available for sale.” However, if any part of the portfolio is sold, the entire portfolio must be written down, resulting in potential losses.

In December, the Federal Deposit Insurance Corporation (FDIC) reported that US banks held $684 billion in unrealized losses. Hoenig believes that lenders are now at a greater risk of realizing these losses, as borrowers are struggling to make payments in the current high-interest rate environment. He points out that non-performing loans have increased significantly, and banks have had to increase their loan loss reserves to strengthen their balance sheets in response to these weak loans.

The commercial real estate sector is particularly vulnerable, as interest rates remain high, and loans are starting to reprice. Hoenig raises the question of whether borrowers can still make their payments if the cap rate for their loans increases from 5-6% to 9-10%. He concludes that both the Federal Reserve and market investors are aware of the industry’s vulnerability.

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