The rapid rise in interest rates in recent months has caused a sharp increase in unrealized losses on securities held by banks. These losses are not yet realized, meaning that the banks have not actually sold the securities and taken a hit to their bottom line. However, they are a significant risk to the banks’ financial health, and could lead to downgrades by ratings agencies, bank failures, and even a financial crisis.
The top five banks in the United States with the largest unrealized losses on securities are:
Wells Fargo: $40 billion
JPMorgan Chase: $40 billion
Citigroup: $25 billion
Bank of America: $20 billion
Morgan Stanley: $15 billion
These losses are a result of the fact that the value of bonds has fallen as interest rates have risen. When interest rates rise, the price of bonds falls, because investors are willing to pay less for a bond that will pay them a lower interest rate. This has caused the value of the bonds held by banks to fall, resulting in unrealized losses. The recent downgrades by Moody’s of several major banks is a further sign of the risks posed by unrealized losses. Moody’s downgraded the ratings of Bank of America, Wells Fargo, and Citigroup, citing the banks’ exposure to rising interest rates and the potential for further losses on securities.
The collapse of two major banks in the United States this summer, First Republic Bank and Signature Bank, is a stark reminder of the dangers of unrealized losses. Both banks were heavily exposed to the tech sector, and their stock prices collapsed when interest rates began to rise and the tech sector began to decline.
The rapid interest rate hikes by the Federal Reserve have caught many banks unprepared. The banks have not had enough time to adjust their portfolios to the new interest rate environment, and as a result, they are facing significant losses on securities. The unrealized losses on securities held by banks are a serious risk to the financial system. If these losses are not contained, they could lead to a financial crisis. The Federal Reserve and other regulators need to take steps to mitigate these risks, such as requiring banks to hold more capital and to reduce their exposure to risky assets.
In addition to the risks mentioned above, unrealized losses on securities can also have a number of other negative consequences for banks. For example, they can:
Reduce the banks’ ability to lend money to businesses and consumers.
Make it more difficult for banks to raise capital.
Lead to a decline in the banks’ stock prices.
Increase the risk of bank failures.
The dangers of unrealized losses on securities are a serious threat to the financial system. Combined with over $1 Trillion in unsecured credit card debt, a rise in Unionism, gasoline at a two decade high with further increases due to winter blend, and potential antitrust issues being discussed with respect to GIS Field Services and Littlejohn & Co. the reality is no matter which direction the Industry goes this winter, none will be comfortable.