U.S. banks on brink of collapse? $517 billion losses threaten 63 banks

The state of the U.S. banking system is frequently analyzed. Recent figures from the Federal Deposit Insurance Corporation (FDIC) reveal a nuanced situation.

In the first quarter of 2024, banks saw a notable increase in profits. The FDIC reports that the aggregate net income for 4,568 insured banks climbed to $64.2 billion, a rise of $28.4 billion or 79.5% compared to the previous quarter.

This growth is largely due to a sharp reduction in non-interest expenses, partially because of one-time charges, which are unusual expenses recorded by large banks in the prior quarter.

Furthermore, banks experienced higher non-interest income and reduced provision expenses in Q1 2024. Despite these positive developments, unrealized losses continue to be a significant challenge in the U.S. banking system.

Unrealized losses on the rise among the U.S. banks

Banks’ unrealized losses have surged, reaching $517 billion, primarily due to their investments in residential mortgage-backed securities.

The value of these securities drops when interest rates rise. Although these losses are only realized when the securities are sold, they can pose a significant burden if banks need to quickly raise cash.

This situation marks the ninth consecutive quarter of high unrealized losses, which align with the Federal Reserve’s interest rate increases that began in early 2022.

Increase in the Number of Problem Banks in the U.S.

The FDIC has also noted an increase in the number of banks on its Problem Bank List. These banks are at risk of insolvency due to various financial weaknesses. However, the FDIC stresses that the number of problem banks remains within the historical range seen during non-crisis periods.

The federal agency assures that the U.S. banking system is not in immediate danger. However, it acknowledges ongoing challenges such as inflation, volatile stock markets, and geopolitical tensions, which could affect banks' ability to lend, generate profits, and maintain sufficient liquidity.

Additionally, specific loan portfolios, including those for office properties and credit cards, require close monitoring due to potential deterioration. The FDIC will continue to oversee these issues, along with funding pressures and shrinking profit margins.