U.S. Banks are sitting on $1.7 trillion in unrealized losses, research says. That’s not a problem—until it is
"As long as people aren't all coming in at the same time and demanding that their deposits back, you're okay, but that's exactly what's been happening," Prof. Stephan Weiler told Fortune. "So the chances of facing those unrealized losses are going up."
As long as people all dont try to take out their money from these basically insolvent banks, the system stays afloat.
After the rapid collapse of Silicon Valley Bank and Signature Bank earlier this month, along with Credit Suisse’s untimely demise last week, regulators and business leaders have made it a point to publicly assure consumers that banks are safe. The potential for “contagion” throughout the financial system is now slim after the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and Treasury came together to backstop all depositors, both uninsured and insured, at SVB and Signature, they say.
Treasury Secretary Janet Yellen, for example, told lawmakers on the Senate Finance Committee last week after the second- and third-largest bank failures in history that Americans “can feel confident” about the safety of their deposits. And Citigroup CEO Jane Fraser told the Economic Club of Washington D.C. on Wednesday that the banking system is “sound,” and both large and regional banks are “well-capitalized,” adding “this is not a credit crisis,” Reuters reported.
When Credit Suisse went under shortly after Silicon Valley Bank, analysts argued that it was a scandal-plagued institution that had racked up billions in losses from high profile issues—including the Archegos hedge fund implosion of 2021—and its clients and depositors merely lost confidence. And they note that Silicon Valley Bank made fatal, and easily avoidable, errors in risk management that aren’t indicative of the health of the overall financial system.
But SVB also suffered from heavy unrealized losses caused by rising interest rates that helped to trigger a bank run from its large base of uninsured depositors. And a new paper by researchers at New York University on March 13 found that they aren’t the only ones with these issues—U.S. banks had unrealized losses of $1.7 trillion at the end of 2022. The losses were nearly equal to banks’ total equity of $2.1 trillion, professors Philip Schnabel and Alexi Savov and the University of Pennsylvania’s Itamar Drechsler explained.
