Several large US banks are reportedly under stress due to a larger problem in the banking sector. According to a report by the Federal Deposit Insurance Corporation (FDIC), these banks are sitting on $620 billion in unrealized losses as they hold assets on their books that have decreased in value.
This includes securities that are available for sale or held to maturity. The decline in the value of these assets has meaningfully reduced the reported equity capital of the banking industry, the FDIC said in its report last week. The collapse of Silicon Valley Bank (SVB) is one example of this larger problem.
SVB was hit hard by the Fed’s rate hike campaign, which reduced the value of bonds that the bank had acquired earlier. The bank attempted to sell these bonds at a loss but was unable to recoup enough funds to recapitalize.
The concerns about a contagion across the financial sector have prompted the Biden administration to shut down SVB and give its customers access to all their deposits starting Monday. The Federal Reserve has also made it easier for banks to borrow from it in emergencies. However, these steps were not enough to reassure Asian markets, which fell on Monday.
The Fed is expected to continue raising interest rates, which will likely continue to weigh on the financial system. The central bank is set to hold its next policy meeting on March 21-22.
“What investors have to expect coming into tomorrow and beyond is that we are going to be dealing with a lot of event risk,” Michael Purves, chief executive of Tallbacken Capital Advisors, told Reuters. “There are still going to be lingering questions with other regional banks.”
In another development, New York’s Signature Bank, which serves a customer base concentrated on the tech sector, was also shut down by regulators. The situation remains fluid and investors are advised to keep a close eye on developments in the banking sector.
