US banks are sitting on $1.7 trillion in unrealized losses, research says. That wasn’t a problem—until it

After the rapid demise of Silicon Valley Bank And signature bank Earlier this month, in line with the untimely demise of Credit Suisse last week, regulators and business leaders took a stance that they must publicly assure consumers that banks remain safe. . Potential for “Infectious Diseases” in the entire financial system is now becoming fragile after the arrival of the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Treasury together to support all depositors, both uninsured and insured, at SVB and Signature, they said.

For example, Treasury Secretary Janet Yellen told lawmakers about Senate Finance Committee last week after the second and third largest bank failures in history that Americans “can feel confident” about the safety of their deposits. And Citigroup CEO Jane Fraser told the Economic Club of Washington D.C. on Wednesday that the banking system is “healthy” and that both large and regional banks are “well-capitalized,” adding: “This is not a credit crisis.” Reuters report.

When Credit Suisse went bankrupt shortly after Silicon Valley Bank, analysts argued it was a scandal-get sick institutions that have lost billions of dollars from well-known issuances — including hedge fund Archegos explosion of 2021—and its customers and depositors are merely loss of confidence. And they note that Silicon Valley Banking was fatal and easy avoidErrors in risk management are not indicative of the health of the entire financial system.

But SVB also suffered heavy unrealized losses as rising interest rates helped trigger bank withdrawals for large numbers of uninsured depositors. And a new one paper of researchers at New York University on March 13 found that they were not the only ones experiencing these problems—US banks had unrealized losses of 1, $7 trillion at the end of 2022. This loss is roughly equal to the total equity capital of the banks of $2.1 trillion, explains University of Pennsylvania professors Philip Schnabel and Alexi Savov and Itamar Drechsler .

Rising interest rates have reduced the value of U.S. Treasuries and mortgage-backed securities that make up a large portion of many banks’ assets. in other paperAlso from March 13, university researchers found that the assets of US banks have lost 10% of their value in the past year alone.

Additionally, of the $17 trillion total in U.S. bank deposits, nearly $7 trillion is currently uninsured by the FDIC, according to that article. The study’s authors—including Erica Xuewei Jiang of the University of Southern California, Gregor Matvos of Northwestern University, Tomasz Piskorski of Columbia University and Amit Seru of Stanford University—explain that if half of the depositors do not This insured decision to withdraw after the recent banking turmoil, it could put hundreds of billions of dollars in deposits in jeopardy.

“If withdrawing uninsured deposit even cause small sell out [of assets], there will be essentially more banks at risk,” they wrote. “Overall, these calculations suggest that the recent decline in bank asset values ​​has significantly increased the fragility of the US banking system.”

There is no fire without spark

Unrealized losses are not reflected on a bank’s balance sheet due to an accounting practice where assets are kept on a bank’s books at the value at which they were purchased, rather than market value. their current. And Stephan Weiler, professor of economics at Colorado State University and co-director of the Institute for Regional Economic Development, explains that banks will only realize these losses if they are forced to sell their holdings of the bank. themselves in the context of banks fleeing when depositors withdraw their funds. people. That’s what happened to SVB, whose depositors demanded massive returns, forcing the bank to sell mortgage-backed securities for Pre-tax loss of $2.4 billion.

“As long as everyone doesn’t come in at the same time and ask for their deposit back, you should be fine,” says Weiler. Luck Thursday.

Problem, JPMorgan analysts headed by Nikolaos Panigirtzoglou note This week, whether $1 trillion in deposits was withdrawn from the “most vulnerable” US banks following the collapse of SVB.

“So the likelihood of facing those unrealized losses increases,” warns Weiler, and that could lead to more bank runs.

Because of this potential problem for US banks, many politicians, including Massachusetts Senator Elizabeth Warren and California Representative Ro Khanna, have argued that the Fed should stop all types of depositors. at all banks to prevent the public from withdrawing money from the bank. And those calls increased this week after Treasury Secretary Janet Yellen told the Senate Budget subcommittee on Wednesday that she was not considering “comprehensive insurance” for all bank deposits. U.S. products, unless “systemic risk” becomes an issue. Reuters report.

Even billionaire hedge fund manager Bill Ackman speak this week that the FDIC “stops the bleeding” and “clearly secures all deposits now.”

“We have moved from implicit support for depositors to [Secretary Yellen’s] explicitly state today that no security is under consideration,” said Ackman, founder of Pershing Square Capital Management tweeted on Wednesday, adding that he “would be surprised if the outflows didn’t accelerate, effective immediately.”

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