FDIC: 63 Problem Banks, over US$500 Billion in Losses

It’s been over a year since Silicon Valley Bank became history, and high rates are still squeezing banks. The number of problem banks has increased again, and a massive number of unrealised losses are depleting their safety nets. The biggest question may be: How much money does the FDIC actually have?

The health status of the U.S. banking system has taken another leap in the wrong direction. Recent data from the Federal Deposit Insurance Corporation shows that the situation is somewhat mixed. For one, the banks reported a significant profit jump for the first quarter of 2024. According to the FDIC, the combined net income for the quarter reached US$64.2 billion, up by US$28.4 billion, or 79.5%, over the previous quarter, among 4,568 insured banks. This improvement comes from a steep decline in non-interest expenses, partly due to one-off charges. Banks also increased their noninterest income and reduced their provision expenses in Q1 2024. However, unrealised losses remain critical problems within the U.S. banking system.

Massive Unrealised losses

The unrealised losses of banks increased to US$517 billion, mainly due to their holdings in residential mortgage-backed securities. It has been over a year since the fall of Silicon Valley Bank, and high interest rates continue to pummel the mortgage sector. The value of these securities is susceptible to changes in interest rates, so when the interest rate rises, these securities lose value. Although such kinds of losses are realised only during the selling of securities, they grow to be a massive burden in the case of banks needing to raise quick cash.

So why would banks need quick cash? The same reason countries need oil reserves -- when some form or instability arises, it can help banks stay afloat. It's the ninth quarter in the string where such unrealised losses have been high, starting around when the Federal Reserve began hiking interest rates late in the first quarter of 2022.

Mortgage rates are on the increase again this year, and according to data from Freddie Mac, a 30-year fixed rate has gone from around 6.6% in early January to just over 7% today. It's the ninth straight quarter of abnormally high unrealised losses since the Fed began to raise interest rates in the first quarter of 2022, the FDIC noted. The unrealised losses and gains on the U.S. banking system from investment securities fluctuated between 2008 and 2021, with a low of nearly US$75 billion in losses and a peak of almost US$150 billion in gains. Meanwhile, problem banks are a growing concern.

U.S. problem banks

The FDIC also reported that the number of banks on its Problem Bank List has increased. The banks on this list are those that are deemed to be at risk of insolvency due to a variety of financial weaknesses. The list is now up to 63 banks. The federal body assures that U.S. banking is not under direct threat, although, it recognises prevalent risks of inflation, unstable stock markets, and geopolitical tensions, which can affect banks' lending capacity, profit earning, and ensuring liquidity. Furthermore, the loan portfolios for individual office properties and credit cards require close supervision of their health. The FDIC will continue to monitor these issues along with funding pressures and diminishing profit margins.

The FDIC defines problem banks as banks with a CAMELS composite rating of four or five. The CAMELS shorthand is that which measures the financial strength of a bank through six categories, which include capital adequacy, assets, management capability, earnings, liquidity, and sensitivity. This runs from one to five, with one being a quality bank, one that involves the slightest concern, and five that is considered the lowest level of performance and most in need of supervisory concern. Total assets held among the 63 problem banks in the first quarter, according to the FDIC, are US$82 billion. This indicates that the majority of the problem banks are of smaller size.

FDIC – The Rescuer of U.S. Banks

The FDIC admits that problem banks are on the rise, especially with the surge in interest rates, but it is not a current concern. "The number of problem banks represents 1.4 percent of total banks, which is within the normal range expected in non-crisis periods of one to two percent of all banks," the FDIC said.

What they did not mention is that over US$9.2 trillion of U.S. bank deposits were uninsured at the end of 2022 -- that's 40% of all deposits. They also fail to mention that they obviously do not and cannot have the funds to bail out even a small-scale banking collapse. As of December 31, 2022, the balance of FDIC's Deposit Insurance Fund was only US$128.2 billion.

The fractional reserve system compounds the problem by linking deposits together with webs of leverage. If interest rates are held high, this could lead to a continued collapse of small banks and a concentration of power for the likes of big banks, such as JP Morgan.