US Banking System Meltdown? Hundreds of Billions of Dollars in Unrealized Losses
Macro strategist Lyn Alden is sounding the alarm for investors as she warns that the US banking system is reportedly sitting on hundreds of billions of dollars worth of unrealized losses.
Alden explained in her newsletter that the current banking crisis differs from the 2008 financial crisis, as banks largely invested in US treasuries or bonds from 2020 to 2021 when the US government introduced fiscal stimulus and the Fed kept interest rates low.
While these fixed-income securities are generally safer than the subprime mortgages that caused the 2008 financial crisis, the Federal Reserve’s aggressive interest rate hikes over the past year have significantly decreased the value of treasuries held by US banks.
The cause of the banking crisis
According to Alden, the Federal Reserve raised interest rates quickly at the quickest absolute pace in decades, from 0.08% to 4.57% in one year, or a 57x increase. This historical surge in interest rates has decreased the value of treasuries held by US banks.
Treasuries tend to plummet in value when interest rates are soaring. Older bonds bought when interest rates were low must now compete with new treasuries that offer higher yields due to surging interest rates. As a result, sellers are left booking losses.
Alden noted that after a year of rapid interest rate increases, the prices of those fixed-income securities are now lower than when banks bought them. For example, if a bank bought a 10-year Treasury note when yields were 1.5% and today they are 4%, then those older Treasuries would be discounted in price by about 15-20% by any potential buyers.
Due to buying so many securities when interest rates were low that are now heavily discounted if they were to be sold, banks have a lot of unrealized losses, over $600 billion worth of unrealized losses, in fact.
Investments can held to maturity
Alden said banks can sit on these losses and get all of their investments back if they hold the bonds to maturity. However, the current bank run is forcing institutions to sell these instruments at a heavy discount to meet depositor demand.
Last week, Silicon Valley Bank collapsed after suffering a run and revealing $1.8 billion in losses, primarily due to selling US bonds that lost much of their value.
While the banking system reportedly sits on hundreds of billions of dollars worth of unrealized losses, Alden believes banks can survive this crisis. She noted that they were already well-capitalized. Even if banks had to realize the losses, it wouldn’t lead to a systemic failure as it did in 2008.
Nonetheless, the situation remains volatile, and investors and depositors should pay close attention to the situation.