Taxpayers won’t suffer any losses, Biden said as he detailed actions to keep the banking system safe.
The collapse of Silicon Valley Bank last week spooked investors as it highlighted a larger problem in the banking sector: The widening gap between the value that givers large loans placed on the bonds they hold and their real market value.
SVB’s demise was partly tied to a drop in the value of the bonds it bought during the boom, when it had lots of customer deposits coming in and needed somewhere to keep cash.
But SVB is not the only organization with that problem. US banks are suffering an unrealized $620 billion loss (assets depreciated but not yet sold) at the end of 2022, according to FDIC.
What is happening: Back when interest rates were near zero, US banks bought a lot of bonds and Treasuries. Now, as the Federal Reserve raises interest rates to fight inflation, those bonds have fallen in value.
As interest rates rise, newly issued bonds begin to pay higher interest rates to investors, which makes old, low-yielding bonds less attractive and less valuable.
As a result, most banks have some unrealized losses on their books.
“The current interest rate environment has had a significant impact on the profitability and risk profile of banks’ investment and financing strategies,” said FDIC President Martin Gruenberg. FDIC Martin Gruenberg said in a prepared speech at the International Banking Institute last week. “Unrealized losses undermine the bank’s ability to meet unexpected future liquidity needs.”
In other words, banks may find that they have less cash than they think they should – especially when they need it – because their securities are worth less than they expected.
Jens Hagendorff, professor of finance at King’s College London, said: “Many institutions – from central banks, commercial banks and pension funds – sit on assets that are worth significantly less than newspapers their financial statements. “The resulting losses will be large and need to be financed somehow. The scale of the problem is starting to cause concern.”
However, analysts say there is no need to panic.
“[Falling bond prices are] only really a problem in a situation where your balance sheet is sinking pretty fast… [and you] Luc Plouvier, senior portfolio manager at Van Lanschot Kempen, a Dutch asset management firm.
Most major U.S. banks are in good financial standing and won’t be forced to record bond losses, Gruenberg said.
Shares of larger banks were steady on Friday after plunging for their worst day in nearly three years on Thursday.
CNN’s Julia Horowitz and Anna Coobin contributed to this post.
