Banks across America are sitting on $620 billion of ‘unrealized losses’ – assets which have decreased in value but have not yet been sold – – the head of the Federal Deposit Insurance Corporation warned.
News of the worrying shortfall came amid the closure of Silicon Valley Bank – the largest collapse since Washington Mutual in 2008.
As the government scrambles to prevent contagion, the Federal Reserve announced on Sunday night that all depositors would get their money back.
Yet the revelation about the ‘unrealized losses’ will only serve to raise concerns about the U.S. banking industry.
The ticking time bomb is due to U.S. banks buying Treasuries and bonds while interest rates were low, but, with interest rates now rising, finding these bonds have declined in value.
When interest rates rise, newly issued bonds start paying higher rates to investors, which makes the older bonds with lower rates less attractive and less valuable.
Most banks and pension funds are affected.
‘The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies,’ said Martin Gruenberg, chair of the Federal Deposit Insurance Corporation (FDIC).
