Federal Reserve weakened U.S. banks with $620 billion in unrealized losses

U.S. banks were sitting on $620 billion in unrealized losses from securities that had dropped in price at the end of 2022, based on Federal Deposit Insurance Corporation data, with many regional banks facing big hits as Federal Reserve interest rate hikes undermine the value of long-term assets.

Interest rate hikes approved by the Federal Reserve Bank, intended suppress economic activity to combat inflation, caused those losses by having dramatic effects on the profitability and risk profile of banks’ funding and investment strategies.

Those losses are a direct result of Federal Reserve interest rate hikes, which mean assets acquired by banks when interest rates were lower are now worth less than their face values.

Unrealized losses on securities have reduced the reported equity capital of the banking industry.

“The increase in interest rates also has had direct effects on banks’ income and expense,” said FDIC Chairman Martin Gruenberg. “In 2022 bank results, we are seeing the typical near-term boost to bank income from higher interest rates as the interest rates banks pay on deposits tend to lag increases in the market interest rates banks receive on loans.”

Annual auto loan charge-off rates increased 83 basis points to 1.13 percent, and credit card charge-offs increased 87 basis points to 2.50 percent in 2022.

Backed by the U.S. government, Treasury bills, or T-bills, have terms ranging from four weeks up to 52 weeks, and investors receive interest when the asset matures.

Investors swarmed into U.S government bonds after the collapse of Silicon Valley Bank and subsequent government backstop of the banking system but the rush sent Treasury yields tumbling in the largest three-day decline since Oct. 22, 1987.

That slide followed the Oct. 19, 1987 stock market crash — known as “Black Monday” in which the S&P 500 plunged 20% for its worst one-day drop— and it was bigger than the 2-year yield plummet that took place in three days following the 9/11 attacks.

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