Banking Crisis Update: Estimated $650 Billion in Unrealized Bond Losses

According to recent estimates, the 2023 banking crisis looks to be far from resolution.

Major banks are currently facing significant unrealized losses of around $650 billion, as stated by Moody’s.

This latest development in an ongoing banking crisis has arisen due to a bond-market crash and the subsequent Treasury-market rout, which has affected the value of bond holdings held by these banks.

What’s Happening Today

The impact is not limited to Wall Street, as it has resulted in a decline in share prices for prominent financial institutions, including Bank of America.

The root cause of the bond-market crash can be traced back to concerns over rising interest rates and the long-term sustainability of the United States’ substantial deficit.

As a result, the value of Treasury bonds, which are used by the government to finance its spending, has experienced a significant decline.

For instance, BlackRock’s iShares 20+ Year Treasury fund, a key indicator of longer-duration debt prices, has plummeted by 48% since April 2020.

Additionally, 10-year Treasury yields, which move inversely to prices, recently reached their highest level in 16 years, surpassing 5%.

Unrealized losses refer to the decline in the value of bond holdings held by banks, which they have chosen to retain rather than sell.

Moody’s data suggests that US financial institutions have accumulated $650 billion of unrealized losses by September 30, a 15% increase from June 30. It is worth noting that these losses are distinct from actual debt and do not represent immediate financial obligations that need to be repaid.

The impact of these unrealized losses is not uniform across banks. Bank of America appears to be the most affected, as it has disclosed a potential $130 billion hole in its balance sheet.

Other major players such as Citigroup, JPMorgan Chase, and Wells Fargo have also reported substantial unrealized losses in the tens of billions, as indicated in their second- and third-quarter earnings reports.

Concern of these unrealized loss figures is now surrounding the major banks, particularly Bank of America, with some market veterans expressing apprehension about the potential insolvency of the bank if the Federal Reserve raises interest rates.

Is it Time for Serious Concern about a Larger Banking Crisis?

Perhaps not … well, not yet anyway

While there is a possibility that the current situation could lead to a mass withdrawal of funds, similar to what occurred earlier this year with Silicon Valley Bank, this has not yet materialized.

In fact, Bank of America has experienced an increase in deposits, with approximately 200,000 new accounts opened in the third quarter.

Additionally, some analysts believe that the worst of the Treasury-market rout may be over, as the Federal Reserve has begun signaling the conclusion of its tightening campaign. Recent weeks have seen a softening of 10-year yields, falling from 5% to 4.6% as of Tuesday.

Do Executives have the Necessary Experience for this Kind of Banking Crisis?

The lack of experience among banking executives with precipitously rising bond yields since before the 2008 Great Financial Crisis poses a significant risk in the banking industry, considering the current banking industry crisis.

In the landscape of rising bond yields, as highlighted above, how many banking execs were around earlier than 15 years ago when the FED lowered interest rates to near zero? Many bankers have only managed their banks in an era of low interest rates.

Given the limited experience of younger banking executives in dealing with precipitously rising bond yields since the 2008 Great Financial Crisis, there is a heightened risk of potential missteps and miscalculations in managing the impact of such scenarios.

Their lack of familiarity with rapidly changing bond market dynamics increases the uncertainty and vulnerability of the banking industry, making it crucial for banks to closely monitor and manage their exposure to bond market risks.