US Banks Face $413.2 Billion Unrealized Losses Amid Market Volatility

US banks are currently grappling with $413.2 billion in unrealized losses on their balance sheets, as revealed in the Federal Deposit Insurance Corporation's (FDIC) Quarterly Banking Profile for the first quarter of 2025. The report showed a $67.5 billion reduction in unrealized losses on securities, which might initially appear as a positive development. However, the FDIC cautioned that this decrease is likely to have been reversed due to the extreme volatility in the bond market and the rising Treasury yield curve.

The FDIC explained that the decrease in unrealized losses was primarily due to a drop in longer-term interest rates, such as the 30-year mortgage rate and the 10-year Treasury rate, during the first quarter. These lower rates increased the value of securities held by banks, thereby reducing unrealized losses. However, the FDIC warned that the subsequent increase in longer-term interest rates since the end of the first quarter would likely negate these improvements if measured today.

Rebel Cole, a former employee of the Federal Reserve System, expressed concern over the situation. He noted that the losses pose a serious and ongoing threat to lenders, stating that a single negative news story about any of these banks could potentially trigger another banking crisis similar to the one experienced in March 2023. Cole was surprised that such a crisis had not yet occurred.

The FDIC's report also revealed other key figures. Banks recorded a $180.9 billion increase in domestic deposits, which represents approximately a 1% rise. Additionally, there was a $3.8 billion increase in net income, bringing the total to $70.6 billion. The reserve coverage ratio, however, declined from 179.9% to 168.8%.

The situation underscores the delicate balance that banks must maintain in the face of fluctuating interest rates and market volatility. The FDIC's warnings serve as a reminder of the potential risks that banks face, and the need for vigilance in managing their financial positions. As the economic landscape continues to evolve, it will be crucial for banks to adapt and mitigate these risks to ensure stability and avoid potential crises.