It has been more than a year since the regional banking crisis exposed vulnerabilities in the financial system. A new Federal Deposit Insurance Corporation (FDIC) report discovered that the banking sector is still grappling with ballooning unrealized losses, a high number of “problem” banks, and various challenges that could worsen from high inflation and interest rates.
The U.S. financial regulator released the findings of the “FDIC Quarterly Banking Profile First Quarter 2024” report on May 29. Officials confirmed that unrealized losses on available-for-sale and held-to-maturity securities rose by $39 billion to $517 billion. This, the report noted, represented the ninth consecutive quarter of “unusually high unrealized losses” since the Federal Reserve started raising interest rates in March 2022.
An increase in unrealized losses on residential mortgage-backed securities accounted for most of the January-March jump.
The FDIC report further revealed that the number of problem banks totaled 63 in the first quarter, up from 52 in the fourth quarter of 2023. They represented 1.4 percent of total U.S. banks, “which was within the normal range for non-crisis periods of one or two percent of all banks.”
These banks appeared on the “Problem Bank List” because they contained a CAMELS (Capital adequacy, Assets, Management capability, Earnings, Liquidity, Sensitivity) composite rating of “4” or “5.”
CAMELS is the FDIC’s 1-5 rating system, which assesses a financial institution’s performance, risk management practices, and degree of supervisory concern.
Despite the banking system’s “resilience” in the first three months of 2024, the FDIC warned that the finance industry “still faces significant downside risks” from high inflation, geopolitical uncertainty, and volatility in market interest rates.
“These issues could cause credit quality, earnings, and liquidity challenges for the industry,” the report stated. “In addition, deterioration in certain loan portfolios, particularly office properties and credit card loans, continues to warrant monitoring.”
More Turbulence Ahead, Experts Warn
U.S. officials, be it at the Federal Reserve or the Treasury Department, have repeatedly assured the public that the banking system is safe, sound, resilient, and highly liquid.
However, a wave of reports suggests that there could be more turbulence ahead, especially concerning commercial real estate (CRE).
New data analysis from Florida Atlantic University discovered that 67 U.S. banks are at a high risk of failure due to their exposure to CRE.
The more than five dozen entities possess exposure to CRE greater than 300 percent of their total equity, the study found.
“This is a very serious development for our banking system as commercial real estate loans are repricing in a high interest-rate environment,” said Rebel Cole, Ph.D., a Lynn Eminent Scholar Chaired Professor of Finance at Florida Atlantic University’s College of Business.
“With commercial properties selling at serious discounts in the current market, banks eventually are going to be forced by regulators to write down those exposures.”
Another study found that large U.S. banks might have more CRE exposure than financial regulators think because of credit lines and term loans given to real estate investment trusts (REITs).
Commercial real estate properties sit on the market in Costa Mesa, Calif., on April 9, 2021. (John Fredricks/The Epoch Times)
Researchers, including former Reserve Bank of India’s deputy governor, Viral Acharya, purported that big banks’ CRE lending exposure balloons by approximately 40 percent when indirect lending to REITs is factored in.
In February, the Mortgage Bankers Association (MBA) projected that 20 percent, or $929 billion, of the $4.7 trillion outstanding commercial mortgages held by investors and lenders will mature this year. This is a 28 percent increase from the $729 billion that matured in 2023.
“The lack of transactions and other activity last year, coupled with built-in extension options and lender and servicer flexibility, has meant that many loans that were set to mature in 2023 have been extended or otherwise modified and will now mature in 2024, 2026, 2028 or in other coming years,” Jamie Woodwell, head of commercial real estate research at MBA, said. “These extensions and modifications have pushed the amount of CRE mortgages maturing this year from $659 billion to $929 billion.”
Fitch Ratings analysts asserted in March that “current trends in office property values suggest further declines” that mirror what occurred during the global financial crisis.
The Federal Reserve’s Bank Term Funding Program, an emergency lending facility for financial institutions facing fiscal pressures launched in the fallout of the regional banking meltdown, expired in March.
State of Deposits
While total commercial bank deposits are still below the April 2022 all-time high of $18.2 trillion, they have been steadily climbing since the Silicon Valley Bank and Signature Bank failures, totaling roughly $17.6 trillion.
Deposits at large commercial banks were $10.84 trillion in April 2023. By comparison, deposits at small domestic chartered commercial banks are at a record high of $5.402 trillion.
In recent years, there has been a notable trend of deposit concentration as the five biggest banks control about one-third of all U.S. deposits. JPMorgan Chase leads the industry.
According to a Securities and Exchange Commission (SEC) filing, the bank has roughly 14 percent of all U.S. deposits, totaling $2.4 trillion.
The total number of FDIC-insured commercial banks has been steadily declining since the 1984 peak of 14,469.
In 2023, FDIC data show there were 4,036 banks as more institutions have merged over the years.
