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

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

The health of the U.S. banking system is a topic of constant scrutiny. Recent data from the Federal Deposit Insurance Corporation (FDIC) paints a mixed picture.

Banks reported a significant profit jump for the first quarter of 2024. According to the FDIC, the combined net income for 4,568 insured banks reached $64.2 billion, a surge of $28.4 billion or 79.5% compared to the previous quarter. 

Quarterly net income change for U.S. banks. Source: FDIC
Quarterly net income change for U.S. banks. Source: FDIC

This upswing is attributed to a significant decline in non-interest expenses, partly due to one-time charges, referring to irregularly billed items recognized by large banks in the prior quarter. 

Additionally, banks benefited from higher non-interest income and lower provision expenses in Q1 2024. However, unrealized losses remain a significant problem in the U.S. banking system.

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

Banks’ unrealized losses have increased significantly, reaching $517 billion. These losses stem primarily from their holdings in residential mortgage-backed securities

When interest rates rise, the value of these securities falls. While these losses are realized once the securities are sold, they can become a significant burden if banks need to raise cash quickly. 

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

Increased number of problem banks in the U.S.

The FDIC also reported a rise 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 emphasizes that the number of problem banks remains within the historical range observed during non-crisis periods.

Federal agency assures that the US banking system isn’t in immediate danger. However, it acknowledges ongoing challenges posed by inflation, volatile stock markets, and geopolitical tensions. These factors could impact banks’ ability to lend, generate profits, and maintain sufficient liquidity. 

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

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