More lenders are struggling to keep deposits from fleeing
Rising interest rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses.
So if too many customers tap their deposits at once, it risks a vicious cycle.
Authorities have devoted much of their time and attention since the 2008 financial crisis to ensuring the stability of large “systemically important” banks such as JPMorgan Chase & Co. and Bank of America Corp.
“There are obviously larger institutions that are also exposed to these risks too, but the exposure tends to be a very small part of their balance sheet,”
Bloomberg 10 mars 2023
The four biggest U.S. banks lost $52 billion in market value Thursday.
Index of banks posts biggest drop since pandemic roiled markets nearly three years ago
Rising interest rates have caused the value of existing bonds with lower payouts to fall in value. Banks own a lot of those bonds, including Treasurys, and are now sitting on giant unrealized losses.
Large declines in value aren’t necessarily a problem for banks unless they are forced to sell the assets to cover deposit withdrawals. Most banks aren’t doing so, even though their customers are starting to move their deposits into higher-yielding alternatives. Yet a few banks have run into trouble this week, sparking fears that other banks could be forced to take losses to raise cash.
Banks don’t incur losses on their bond portfolios if they are able to hold on to them until maturity. But if they suddenly have to sell the bonds at a loss to raise cash, that is when accounting rules require them to show the realized losses in their earnings.
Those rules let companies exclude losses on their bonds from earnings if they classify the investments as “available for sale” or “held to maturity.”
The Federal Deposit Insurance Corp. in February reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed’s rate push began.
WSJ 9 March 2023
Banks are now sitting on record mark-to-market losses
Marc Rubinstein Bloomberg 18 oktober 2022
10 banks that may face trouble in the wake of the SVB Financial Group debacle
Silicon Valley Bank wasn’t well positioned for rising interest rates, leading to losses and a dilutive capital raise. Other banks show similar red flags.
MarketWatch 9 March
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