- US commercial banks have seen a significant drop in total deposits, according to recent data from the Federal Reserve Economic Data (FRED) system.
- The banking industry is grappling with high interest rates, unrealized losses on US bonds, and concerns about exposure to commercial real estate.
- Former Kansas Fed president Thomas Hoenig warns that 722 US banks are still at risk of failure due to massive unrealized losses.
US banks are facing a potential crisis as total deposits drop and the industry grapples with high interest rates and unrealized losses. This article delves into the current state of the US banking system and the potential implications for the financial market.
Significant Drop in Total Deposits
Recent data from the Federal Reserve Economic Data (FRED) system shows a significant drop in total deposits in US commercial banks. In just seven days, from April 10th to April 17th, total deposits fell $133.163 billion, from $17.580 trillion to $17.446 trillion. This drop has erased the gains that banks made at the start of this year, and total deposits remain below the industry’s all-time high of $18.205 trillion, which was reached right before last year’s banking crisis began.
Challenges Faced by the Banking Industry
Amid another bank failure last week, the banking industry continues to battle high interest rates from the Fed, unrealized losses on US bonds, competition from money market funds, and concern about exposure to commercial real estate. Former Kansas Fed president Thomas Hoenig warns that 722 US banks are still at risk of failure due to massive unrealized losses. He explains that these banks are vulnerable due to interest rates that are much higher than when many of these loans were made.
Unrealized Losses and the Risk of Failure
In December, the Federal Deposit Insurance Corporation (FDIC) reported that US banks were holding $684 billion in unrealized losses. Hoenig warns that lenders are now at greater risk of realizing those losses with borrowers increasingly failing to make payments amid a high interest rate environment. Non-performing loans are rising substantially, and banks have had to add to their loan loss reserves to try and shore up their balance sheets. With interest rates remaining high, many of these loans are now just starting to reprice, particularly commercial real estate loans.
Conclusion
The current state of the US banking system is concerning, with a significant drop in total deposits and the looming threat of unrealized losses. The industry is grappling with high interest rates and concerns about exposure to commercial real estate. As the situation unfolds, it will be crucial for banks to manage these risks effectively to prevent further losses and potential failures.
