Unrealized Losses Loom Large Over U.S. Banks

The FDIC data shows a significant increase in unrealized losses at banks, primarily due to the Fed's interest rate hikes. These losses have reached a peak of $655 billion but have since declined slightly to $512 billion. While interest rate cuts could help mitigate these losses, they may also negatively impact bank profitability. There are concerns about potential risks beyond unrealized losses, such as a recession or financial crisis, which may be influencing the Fed's decision to cut rates.

FDIC Quarterly 2024 Vol 18 No 2

Notes

1. HTM: Stands for Held to Maturity. These securities are purchased with the intent to hold them until maturity. Unrealized gains or losses on HTM securities are not recognized in the income statement.
2. AFS: Stands for Available for Sale. These securities can be sold at any time. Unrealized gains or losses on AFS securities are recognized in other comprehensive income, which is a part of equity.

Proactively Assess Your Bank’s Financial Health with FAU’s Free Tool

If you wish to be proactive and examine your bank's unrealized loss ratio, you can utilize this free tool provided by Florida Atlantic University. Although this screener is not flawless and does not reveal all aspects of a bank's financial well-being, it serves as a valuable starting point.

In the article, the (HTM+AFS) Loss to CET1 Capital column is likely the most important in the context of understanding the impact of unrealized losses on U.S. banks.

Here's why:

• CET1 Capital: This is a key measure of a bank's financial strength and resilience. A higher CET1 ratio indicates a stronger bank.
• (HTM+AFS) Loss to CET1 Capital: This column shows the percentage impact of unrealized losses on the CET1 capital ratio. A higher percentage means that unrealized losses are having a more significant negative impact on the bank's financial health.

By analyzing this column, investors and regulators can assess how vulnerable banks are to potential losses from changes in interest rates. A high percentage suggests that the bank's financial stability could be compromised if interest rates continue to rise or if the bank is forced to sell its securities at a loss.

100 Largest Banks Face Potential Unrealized Losses: Only 20 Riskiest Listed