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L2E: Edition 70 Newsletter. As the Fed continues hiking rates and… | by Learn2Earn | Coinmonks | May, 2023
US Bank Failures are Sky Rocketing
Balaji Srinivasan’s tweet on May 5th brought attention to the fact that 722 U.S. banks are experiencing over 50% in unrealized losses as a result of the Federal Reserve’s aggressive rate hikes.
This alarming statistic sheds light on the potentially significant consequences that rising interest rates can have on the financial sector.
The unrealized losses faced by these 722 banks could be attributed to their investment portfolios, particularly in long-term fixed-income securities such as bonds.
As interest rates rise, bond prices fall, leading to a decrease in the market value of these securities. Consequently, banks holding large quantities of bonds in their portfolios may experience significant unrealized losses.
Moreover, as borrowing costs increase, banks may see a decline in the demand for loans. This could lead to a reduction in their interest income and a subsequent decline in their overall profitability.
In addition to this, banks with high levels of adjustable-rate loans in their portfolio could see their net interest margins squeezed as funding costs rise faster than interest income.
On March 24, 2023, a Twitter account called @SEC_digger shared a compelling chart that plotted U.S. banks with assets ranging between $100 billion and $3.2 trillion.
The chart above depicts Unrealized Losses on the X-axis and Estimated Uninsured Deposits on the Y-axis, providing a visual representation of the challenges faced by various financial institutions amidst the current economic environment.
Notably, the chart highlighted banks such as Silicon Valley Bank, Signature Bank, and First Republic Bank, which were underlined in red, indicating that these banks have already failed.
The impact of the aggressive rate hikes and the resulting unrealized losses are not limited to a few banks; the repercussions are being felt across the entire banking industry. This becomes evident when examining the stock performance of various U.S. banks since the beginning of the year.
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