US banks are holding $620 billion in “unrealized losses.” SVB collapse creates tension to depositors. The chairman of the Federal Deposit Insurance Corporation, Martin J. Gruenberg, issued a warning on securities whose worth has declined but have not yet been liquidated.
The news of the alarming shortage came at the same time as the closing of Silicon Valley Bank, which was the biggest bank failure since Washington Mutual in 2008.
The Federal Reserve said on Sunday night that all customers will get their money back as the government works to stop the spread of the crisis.
But the information on the “unrealized losses” would only increase worries about the US banking sector.
When interest rates were low, U.S. banks bought Treasuries and bonds. Now that interest rates are going up, the value of these bonds has gone down, making them a ticking time bomb.
As interest rates rise, investors in bonds that have already been issued start getting higher rates. This makes the older bonds with lower rates less appealing and less valuable.
SVB collapse withdrawal rampage
Pension funds and most banks are impacted.
Martin Gruenberg, head of the Federal Deposit Insurance Corporation, said that “the present interest rate environment has had significant consequences on the revenue and risks that have been identified for banks’ financing and investment plans.”
When he spoke at the Institute of International Bankers on March 6, he confirmed that the number was $620 billion.
According to him, most banks have some unrealized losses on securities.
At year-end 2022, the sum of these unrealized losses—which also included assets that might be sold or held until maturity—was nearly $620 billion.
Due to unrealized losses on securities, the reported equity finance of the financial system has gone down a lot.
In an interview with CNN, Jens Hagendorff, a finance professor at King’s College London, said that the problem was widespread.
“Many organisations,” he claimed, “sit on assets that are worth much less than disclosed in their financial accounts,” including central banks, commercial banks, and pension funds.
The substantial losses that will arise must be funded in some way. The size of the issue is beginning to raise questions.
According to Luc Plouvier, senior portfolio manager at the Dutch wealth management company Van Lanschot Kempen, the issue would not have an impact on the majority of American banks.
“Falling bond prices only become an issue when your balance sheet is rapidly depleting and you are forced to liquidate assets that you wouldn’t normally have to,” he said.
Gruenberg made his remarks four days before Silicon Valley Bank -SVB collapse and the government took control of it.
The 16th largest bank in the US, SVB, mostly works with IT companies and new businesses. Its failure sent shock waves through the financial world.
Investors fled in a panic after it closed on Friday, since the government only insures the first $250,000, so they weren’t sure whether they would receive their money back.
Nonetheless, the Federal Reserve said that all deposits would be secured on Sunday night.
On Friday in New York, the Silicon Valley Bank New York office became vacant. The FDIC did, however, state that SVB customers would have complete access to their insured savings no later than Monday morning after the closure.
The Treasury Secretary, Janet Yellen, had previously said there would be no government rescue.
According to the Federal Reserve statement, there would be no use of public money. The taxpayers do not pay for the Federal Reserve. Instead, interest from its own financial activities directly finances it.
There will be a Deposit Insurance Fund to pay for it. Both bank fees and income from its investments in public liabilities help to finance the DIF.
According to the statement, “A special levy on banks, as required by law, will reimburse any losses to the Deposit Insurance Fund to assist uninsured depositors.”
The Federal Reserve Board said on Sunday that it would provide extra money to qualifying depository institutions to help ensure banks have the capacity to satisfy the demands of all of their depositors.
Joe Biden comforted SVB customers on Sunday night after SVB collapse and said that those “associated with this debacle” need to be found and punished.
“The American people and companies can trust that their bank deposits will be available when needed,” he added.
“I am completely committed to holding those responsible for this mess accountable and to keeping up our work to tighten monitoring and regulation of bigger institutions so we don’t end up in this situation again.”
This post was created with our nice and easy submission form. Create your post!