Borrowers Are Struggling to Pay Down Their Debt, and the Economy is Starting to Notice
May 31, 2024In addition to its role insuring bank accounts for everyday Americans, the FDIC also tracks the overall health of the banking system. And one of the metrics in its sights – unrealized gains and losses on investment securities held by banks – continues to flash warning signs, just like it has for the last two-plus years.
Simply put, unrealized losses on available-for-sale and held-to-maturity securities increased by $39 billion to $517 billion in Q1 2024, driven largely by higher losses on residential mortgage-backed securities.
It’s the ninth straight quarter of unusually high losses in this column since the Fed began raising interest rates in 2022.
Two takeaways here:
- History tells us that significant unrealized losses can be a precursor to bank failures, as we saw during the 2008 Financial Crisis. Bank solvency and liquidity can be impacted if this goes on for too long.
- Bank instability can spread to other financial entities, further destabilizing the market. Investors might flee to perceived safe-haven assets like gold, government bonds, and cash, causing dislocations in other asset markets and further increasing volatility.
Whether or not this trend will continue remains to be seen, but the size of these unrealized losses should not be ignored. Nor should their potential to contribute to market volatility.
#EyeonVolatility
