According to the chair of the Federal Deposit Insurance Corporation (FDIC), Martin Gruenberg, banks across America have $620 billion in ‘unrealized losses’ – assets whose value has decreased but have not yet been sold.
This revelation came to light just four days before Silicon Valley Bank collapsed, which was the largest collapse since Washington Mutual in 2008.
As the government seeks to prevent contagion, the Federal Reserve announced on Sunday night that all depositors would get their money back. However, this news about the ‘unrealized losses’ will only increase concerns about the U.S. banking industry.
The problem is due to U.S. banks purchasing Treasuries and bonds when interest rates were low, but with interest rates now rising, these bonds have declined in value.
Newly issued bonds that pay higher rates to investors make older bonds with lower rates less attractive and less valuable. This affects most banks and pension funds.
Speaking at the Institute of International Bankers on March 6, Gruenberg confirmed the $620 billion figure and said that most banks have some amount of unrealized losses on securities. He added that “unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry.”
Jens Hagendorff, a finance professor at King’s College London, said the problem was widespread, affecting many institutions from central banks, commercial banks, and pension funds.
He stated that “the resulting losses will be large and need to be financed somehow. The scale of the problem is starting to cause concern.” However, Luc Plouvier, senior portfolio manager at Van Lanschot Kempen, a Dutch wealth management firm, said that most American banks would not be affected by the issue.
Gruenberg’s remarks were made four days before Silicon Valley Bank collapsed and was taken over by the federal government. The bank caters primarily to tech clients and start-ups and is the 16th largest in the United States.
Its collapse caused panic among investors who were uncertain whether they would get their money back, as only the first $250,000 is insured by the government. However, the Federal Reserve announced on Sunday evening that all deposits would be protected.
The cash will come from a Deposit Insurance Fund (DIF), which is funded by fees from banks and interest earnings from DIF investments in government obligations.
The Federal Reserve statement said that no taxpayer money would be involved, and any losses to the Deposit Insurance Fund to support uninsured depositors would be recovered by a special assessment on banks, as required by law.
Joe Biden reassured those who bank with SVB, but said that those “responsible for this mess” must be brought to justice.
He added that he is “firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”
»Martin Gruenberg says banks across America have $620 billion in ‘unrealized losses’«
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