US banks sitting on unrealized losses of $620 billion

[Scott]

 

 

Silicon Valley Bank’s collapse last week sent tingles of panic down investors’ spines as it highlighted a larger problem across the banking sector: The widening gap between the value large lenders place on the bonds they hold and what they’re actually worth on the market.

SVB’s downfall was tied, in part, to the plunge in the value of bonds it acquired during boom times, when it had a lot of customer deposits coming in and needed somewhere to park the cash.

But SVB isn’t the only institution with that issue. US banks were sitting on $620 billion in unrealized losses...

https://www.cnn.com/2023/03/12/investing/stocks-week-ahead/index.html

[nigelforbes]

During the 1997 Asian crisis, BOT was holding virtually all their foreign currency reserves in long dated securities that it couldn't sell without incurring a loss. That meant there was no liquidity and no defense. Here we are, over 25 years later and banks in the US are still doing exactly the same thing. It seems some people never learn.

[thaibeachlovers]

It's not that long since the 2008 crisis, and it seems that no lessons were learned. Perhaps because it's still all about short term profit and no concern about long term stability.

[nigelforbes]

10 minutes ago, thaibeachlovers said:

It's not that long since the 2008 crisis, and it seems that no lessons were learned. Perhaps because it's still all about short term profit and no concern about long term stability.

The SVB bank issue was not just about profit, it was about ignorance and lack of ability. The entire global banking industry has been working since 1975, implementing the likes of the Basel regulatory framework, which is designed (in part) to ensure asset liability mismatches don't occur. Then along comes a single bank that is so focused on its business model that it completely ignores the basics of banking controls and Treasury management. 

[thaibeachlovers]

2 minutes ago, nigelforbes said:

The SVB bank issue was not just about profit, it was about ignorance and lack of ability. The entire global banking industry has been working since 1975, implementing the likes of the Basel regulatory framework, which is designed (in part) to ensure asset liability mismatches don't occur. Then along comes a single bank that is so focused on its business model that it completely ignores the basics of banking controls and Treasury management. 

Yes, but the thread isn't just about that bank.

[nigelforbes]

1 minute ago, thaibeachlovers said:

Yes, but the thread isn't just about that bank.

My statements hold true for any bank that is holding those unrealized losses.

[chilly07]

The 2008 financial crisis was started by US banks irresponsible lending so this is nothing new. 

[chilly07]

Bankers at it again! As long as they rake in and stash their commission they really don't care if they bankrupt their bank in the process! 

[placeholder]

12 hours ago, nigelforbes said:

During the 1997 Asian crisis, BOT was holding virtually all their foreign currency reserves in long dated securities that it couldn't sell without incurring a loss. That meant there was no liquidity and no defense. Here we are, over 25 years later and banks in the US are still doing exactly the same thing. It seems some people never learn.

Well, the stress test rules for the banks with over 250 billion in deposits, are required to maintain a higher level of liquidity. I'm not sure how much, if at all, that requirement was watered down by the 2018 revision to Dodd-Frank. I wish this article had offered a breakdown of how much of these underwater assets are owned by the big banks and how much by the rest.

[Stargeezr]

I image that this will make the banking industry in the USA, smarten up a bit.

  I am so glad that the major banks in the USA are a bit more stable.  Can a person in the USA still

go to a bank and buy a house with nothing down. It was possible a few years ago, and I thought that was

a pretty risky thing to be involved with. I still remember a few other financial high risk ventures

in the USA that went south, and cost people lots of money losses.

[Eric Loh]

On 3/13/2023 at 4:35 AM, nigelforbes said:

During the 1997 Asian crisis, BOT was holding virtually all their foreign currency reserves in long dated securities that it couldn't sell without incurring a loss. That meant there was no liquidity and no defense. Here we are, over 25 years later and banks in the US are still doing exactly the same thing. It seems some people never learn.

Agree and add that oversea borrowings in USD to lend to real estate projects, Baht peg and the relatively small foreign reserves were also contributory factors to the 1997 financial crisis.  

[Misty]

On 3/13/2023 at 4:35 AM, nigelforbes said:

During the 1997 Asian crisis, BOT was holding virtually all their foreign currency reserves in long dated securities that it couldn't sell without incurring a loss. That meant there was no liquidity and no defense. Here we are, over 25 years later and banks in the US are still doing exactly the same thing. It seems some people never learn.

Much of this unrealized loss seems to be simply longer dated US treasuries that have fallen in price in the open market due to rises in interest rates.  Whether or not the bank can afford hold the treasuries until maturity (or interest rates falling) is really the issue.  So if this is really a problem for any individual bank depends on the size of the unrealized treasury loss versus the rest of the bank's balance sheet.  It would be good if financial analysts (and journalists) could look at balance sheets from that perspective.

 

1997 Thailand was actually a very different issue.  In 1997 the BoT actually had net negative foreign currency reserves. The BoT had been reporting positive foreign reserves to the market.  However to support the Thai baht, it had purchased futures agreements that weren't being reported publicly.  That is until 2 July 1997 a day I won't forget and when the Thai baht floated and defacto devalued.  Many Thai financial institutions and corporates had USD liabilities, but little to no USD income or assets.  The Thai financial system was bankrupt - something like 58 financial companies disappeared, Thai banks ended up with large Non Performing Loans (NPLs) and their ownership changed dramatically as they were forced to recapitalize. 

 

I'd stress that holding US treasuries with unrealized losses is a very different thing.  To quote the CNN article: "Most large US banks are in good financial condition and won’t find themselves in a situation where they’re forced to realize bond losses, said Gruenberg."  I think this is true.

[nigelforbes]

On 3/13/2023 at 4:47 PM, placeholder said:

Well, the stress test rules for the banks with over 250 billion in deposits, are required to maintain a higher level of liquidity. I'm not sure how much, if at all, that requirement was watered down by the 2018 revision to Dodd-Frank. I wish this article had offered a breakdown of how much of these underwater assets are owned by the big banks and how much by the rest.

It is not that bigger banks have to maintain higher liquidity, the watering down of Dodd-Frank meant that smaller banks had to hold less, initially the line was set at banks with less than US 10 bill. but this was changed under Trump. Basel III Teir 1 capital adequacy ratio is 10.5%, under Dodd Frank it was initially set at 6%. I wrote elsewhere today that US CAR is one of the lowest in the world and averages 14%, only Russia and Morocco are lower whilst European banks average 20% of more, Argentina is 30%.

 

https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp

[placeholder]

12 minutes ago, nigelforbes said:

It is not that bigger banks have to maintain higher liquidity, the watering down of Dodd-Frank meant that smaller banks had to hold less, initially the line was set at banks with less than US 10 bill. but this was changed under Trump. Basel III Teir 1 capital adequacy ratio is 10.5%, under Dodd Frank it was initially set at 6%. I wrote elsewhere today that US CAR is one of the lowest in the world and averages 14%, only Russia and Morocco are lower whilst European banks average 20% of more, Argentina is 30%.

 

https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp

Thanks for the correction. However, under the Obama admnistration the largest commercial banks did sharply and continue increase their liquidity  far above the Basel requirements following the financial crisis and even after recovery was well underway

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2016/pdf/eb_16-01.pdf

Not sure what happened under the Trump administration

 

[placeholder]

38 minutes ago, Stargeezr said:

I image that this will make the banking industry in the USA, smarten up a bit.

  I am so glad that the major banks in the USA are a bit more stable.  Can a person in the USA still

go to a bank and buy a house with nothing down. It was possible a few years ago, and I thought that was

a pretty risky thing to be involved with. I still remember a few other financial high risk ventures

in the USA that went south, and cost people lots of money losses.

Not possible after the financial crisis of 2008.

[nigelforbes]

Just now, placeholder said:

Thanks for the correction. However, under the Obama admnistration the largest commercial banks did sharply and continue increase their liquidity  far above the Basel requirements following the financial crisis and even after recovery was well underway

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2016/pdf/eb_16-01.pdf

Not sure what happened under the Trump administration

 

If you only look at CAR at some big banks you'll naturally get one view, look across all the big banks and you get another, look across all banks and you get a third. Which is why I quoted 14% across all banks.

[placeholder]

Just now, nigelforbes said:

If you only look at CAR at some big banks you'll naturally get one view, look across all the big banks and you get another, look across all banks and you get a third. Which is why I quoted 14% across all banks.

Well, it wasn't really some big banks. It was the top 25. Which would should include all the banks deemed systemically important before Dodd Frank was relaxed.

But I do agree that the standards are now too low for smaller banks.

[nigelforbes]

I'd lost track of how many rate rises the US has had in a short period of time, this graph brought it back to me. Five increases in eight  months, and four were 0.50% or 0.75%. What is stunning is that something like the SVB failure didn't happen sooner and that the bond valuation issue wasn't forced into the open sooner. The problem was arguably nine months old, before Joe public even became aware there was an issue.

 

https://www.telegraph.co.uk/business/2023/03/17/fuse-lit-next-global-crash-going-explode-first-real-question/

 

[nigelforbes]

Before anyone mentions it, yes, equity markets have become very volatile. This is NOT a function of what happened at SVB, nor what happened at CS or any other bank.

 

Options contracts tied to just under USD 3 trillion of securities are due to expire from yesterday onwards. "Quadruple witching, as its known, happens when equity futures and option contracts tied to individual stocks and indexes —- as well as exchange-traded funds — all expire on the same day. Some option contracts expire in the morning, while others expire in the afternoon. This typically happens four times a year, roughly once per quarter". Expect extreme market volatility for about one week.

 

https://www.marketwatch.com/story/u-s-stocks-set-for-wild-swings-as-trillions-in-options-contracts-set-to-expire-friday-bf31c751?siteid=yhoof2