U.S. Banks Face $500 Billion in Off-Book Losses!

FDIC Quarterly Banking Profile

In the first quarter of 2024, unrealized losses on available-for-sale and held-to-maturity securities surged by $39 billion, bringing the total to a staggering $517 billion. This increase was largely driven by higher mortgage rates impacting residential mortgage-backed securities. This marks the ninth consecutive quarter of significant unrealized losses since the Federal Reserve began raising interest rates in early 2022.

Loan Reductions in Major Banks

The FDIC's report, released on May 29th, highlights a $35 billion, or 0.3%, decline in total loans within the banking industry for the first quarter. This reduction was predominantly seen in the largest banks, primarily due to seasonal decreases in credit card loans and lower balances in auto loans. The industry's year-over-year loan growth rate slowed to 1.7%, the lowest since the third quarter of 2021. However, community banks exhibited stronger loan growth, increasing by 0.9% from the previous quarter and 7.1% from the previous year, driven by commercial real estate (CRE) and residential mortgage loans.

Asset Quality and Noncurrent Loans

While overall asset quality remained generally positive, there was a notable decline in the quality of CRE and credit card portfolios. The noncurrent loan rate increased by five basis points to 0.91%, which is still below the pre-pandemic average of 1.28%. The rise in noncurrent loan balances was particularly evident in non-owner occupied CRE loans, especially those related to office spaces at the largest banks. Banks with assets ranging from $10 billion to $250 billion also showed stress in these types of loans. The weak demand for office space and higher interest rates are negatively impacting property values and refinancing abilities, pushing the noncurrent rate for non-owner occupied CRE loans to its highest level since the fourth quarter of 2013.

Net Charge-Off Rates and Credit Card Losses

The industry's quarterly net charge-off rate remained steady at 0.65% for the second consecutive quarter, which is 24 basis points higher than the previous year's rate and 17 basis points above the pre-pandemic average. The net charge-off rate for credit cards reached its highest level since the third quarter of 2011.

Deposits and Funding Trends

Domestic deposits grew by $191 billion for the second consecutive quarter, driven by an increase in transaction accounts. The trend of shifting from noninterest-bearing deposits to interest-bearing deposits continued, with interest-bearing deposits rising by 1.7% quarter over quarter and noninterest-bearing deposits declining for the eighth consecutive quarter. Estimated uninsured deposits increased by $63 billion, marking the first rise since the fourth quarter of 2021.

Problem Banks and Deposit Insurance Fund

The number of banks on the Problem Bank List, identified by a CAMELS composite rating of "4" or "5," rose from 52 in the fourth quarter of 2023 to 63 in the first quarter of 2024, accounting for 1.4% of all banks. Total assets held by problem banks increased by $15.8 billion to $82.1 billion. The Deposit Insurance Fund (DIF) balance reached $125.3 billion on March 31, up by $3.5 billion from the previous quarter. Insured deposits grew by 1.1%, about half the typical growth rate for the first quarter. The reserve ratio, which measures the fund balance relative to insured deposits, increased by two basis points to 1.17%, keeping it on track to reach the 1.35% minimum reserve ratio by the statutory deadline of September 30, 2028.

Conclusion: Resilience Amid Challenges

The banking industry demonstrated resilience in the first quarter of 2024, but significant risks remain due to ongoing inflation, market interest rate volatility, and geopolitical uncertainties. These factors could pose challenges for credit quality, earnings, and liquidity. Additionally, the deterioration in specific loan portfolios, particularly office properties and credit card loans, requires close monitoring. The FDIC will continue to focus on these issues, along with funding and margin pressures, in its ongoing supervisory activities.

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Source: 

FDIC (2024). Federal Deposit Insurance Company. Available At: https://www.fdic.gov/news/speeches/fdic-quarterly-banking-profile-first-quarter-2024