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High interest rates continue to put pressure on the US banking system.
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The FDIC said the U.S. banking system has 63 “problem banks” and is sitting on $517 billion in unrealized losses.
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The upward pressure on mortgage rates has significantly damaged the banking sector.
More than a year after the collapse of Silicon Valley Bank, higher interest rates continue to put pressure on the US banking system.
According to the Federal Deposit Insurance Corporation’s first quarter report, the U.S. banking system is facing a total of $517 billion in unrealized losses and there are 63 “problem banks.”
These losses have been caused mainly by a rise in interest rates over the past two years, which has depressed the price of fixed income securities held by banks.
Banks’ unrealized losses rose by $39 billion in the first quarter compared to the fourth quarter of 2023.
“Higher unrealized losses on residential mortgage-backed securities, reflecting higher mortgage rates in the first quarter, drove the overall increase,” the FDIC said.
Mortgage rates have been rising since the start of the year, with the 30-year fixed mortgage rate rising from about 6.6% in early January to just over 7% today, according to data from Freddie Mac.
“This is the ninth consecutive quarter of unusually high unrealized losses since the Federal Reserve began raising rates in the first quarter of 2022,” the FDIC said.
From 2008 through 2021, the U.S. banking system’s unrealized losses and gains on investment securities ranged from as much as $75 billion in losses to just under $150 billion in gains.
Meanwhile, the 63 problem banks in the first quarter represent an increase of 11 banks compared to the fourth quarter of last year. The FDIC categorizes problem banks as those with a CAMELS composite rating of four or five.
The CAMELS rating measures a bank’s financial strength across six categories, including capital adequacy, assets, management capabilities, earnings, liquidity and sensitivity.
The rating system ranges from one through five, with one representing a high-quality bank that requires the least care, and five representing the weakest performance and requiring the highest degree of supervision.
According to the FDIC, total assets of the 63 problem banks in the first quarter were $82 billion, indicating that most problem banks are smaller in size.
Although the number of problem banks has increased as a result of higher interest rates, this is not yet a cause for concern.
“The number of problem banks represents 1.4% of total banks, which is within the normal range for non-crisis periods of one to two percent of all banks,” the FDIC said.
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