A year following the downfall of Silicon Valley Bank, higher interest rates are exerting pressure on the US banking system, with the FDIC identifying 63 ‘problem banks’ in its latest report.

In brief

  • High interest rates place pressure on the US banking system.
  • The FDIC says the US banking system has 63 “problem banks” and is sitting on $517 billion in unrealised losses.
  • Another daisy chain of traditional bank failures could spark a fresh flight to safety and hard assets.

According to the Federal Deposit Insurance Corporation’s (FDIC) first quarter report, the US banking system is sitting on a ticking time bomb, with a collective $517 billion in unrealised losses distributed among 63 ‘problem banks’.

Banks sustain losses

The losses have partly come about due the surge in interest rates over the last two years, which have suppressed prices of fixed-income securities held by banks.

Unrealised bank losses increased by $39 billion in the first quarter relative to Q4 of 2023.

“Higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase,” the FDIC said.

Mortgage rates have been increasing since the start of the year too, with 30-fixed year rates rising from 6.6% in January to just over 7% today, per Freddie Mac data.

“This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in the first quarter 2022,” the FDIC said.

From 2008 through 2021, the US 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.

Problem banks on the rise

At the same time, the 63 problem banks in the first quarter show an increase of 11 banks since Q4 last year.

The FDIC uses its CAMELS composite rating, which measures financial strength using six categories, including capital adequacy, assets, management capability, earnings, liquidity, and sensitivity.

The rating system ranges from one through five, with one representing a high-quality bank requiring the least degree of concern, and five representing the weakest performance and requiring the highest degree of supervisory concern.

The FDIC suggested that most of the problem banks are smaller in size, and that there’s supposedly no cause for concern just yet.

“The number of problem banks represent 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.

Bitcoin exchanges hands at $71,250 at the time of writing, having enjoyed a sustained rally of 175% since Q4 2023.

Traditional banking woes tend to coincide with increased interest in the crypto frontrunner, as was the case in March 2023 following a string of tradfi banking collapses.

A continued daisy chain of traditional bank failures alluded to by the FDIC, might spark the next upswing for hard assets such as Bitcoin, Litecoin and precious metals.

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