Unrealized losses in the US banking system are once again experiencing an upswing, as per the latest data from the Federal Deposit Insurance Corporation (FDIC).

According to the FDIC’s Quarterly Banking Profile report, banks are currently burdened with over $500 billion in paper losses on their balance sheets, primarily due to their exposure to the residential real estate market.

Unrealized losses are the difference between the price at which banks acquired securities and their current market value. While banks can hold these securities until maturity without reflecting their market value on their balance sheets, unrealized losses can become a significant liability during times when banks require liquidity.

“In the first quarter, unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion, reaching $517 billion. The overall increase was mainly driven by higher unrealized losses on residential mortgage-backed securities, which were a result of the elevated mortgage rates in the first quarter. This marks the ninth consecutive quarter of unusually high unrealized losses since the Federal Reserve began increasing interest rates in the first quarter of 2022.”

The FDIC also reports an increase in the number of lenders on its Problem Bank List during the previous quarter. These banks are considered to be on the verge of insolvency due to financial, operational, or managerial weaknesses, or a combination of these issues.

“The number of banks on the Problem Bank List, with a CAMELS composite rating of ‘4’ or ‘5’, rose from 52 in the fourth quarter of 2023 to 63 in the first quarter of 2024. These problem banks represent 1.4% of all banks, which falls within the normal range of 1% to 2% for non-crisis periods. The total assets held by problem banks increased by $15.8 billion to $82.1 billion during the quarter.”

While the FDIC assures that the US banking system is not currently at immediate risk, it cautions that persistent inflation, volatile market rates, and geopolitical concerns continue to exert pressure on the industry.

“These factors have the potential to create challenges in terms of credit quality, earnings, and liquidity for the industry. Additionally, the deterioration of certain loan portfolios, particularly office properties and credit card loans, necessitates close monitoring. The FDIC will continue to closely supervise these matters, along with funding and margin pressures.”

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