IMPORTANT POINTS:
- US banks reported significant profits in the first quarter of 2024.
- Unrealized losses reached $517 billion, primarily on mortgage-backed securities.
- The number of problem banks has increased, but remains within the historical range observed during non-critical periods.
The health of the U.S. banking system is a topic of constant scrutiny. Recent data from the Federal Deposit Insurance Corporation (FDIC) paints a mixed picture.
Banks reported a significant increase in profits for the first quarter of 2024. According to the FDIC, the combined net income of 4,568 insured banks reached $64.2 billion, an increase of $28.4 billion or 79.5% compared to the previous quarter.
This increase is attributed to a significant drop in non-interest expenses, in part due to one-time charges, referring to items billed irregularly in the prior quarter.
Additionally, banks benefited from higher non-interest income and lower provision expenses in the first quarter of 2024. However, unrealized losses remain a significant problem in the US banking system.
Unrealized losses increase
Banks’ unrealized losses have increased significantly, reaching $517 billion. These losses come primarily from their holdings in residential mortgage-backed securities.
When interest rates rise, the value of these securities falls. While these losses are realized once the securities are sold, they can become a significant burden if banks need to raise cash quickly.
This marks the ninth consecutive quarter of high unrealized losses, coinciding with the Federal Reserve’s interest rate hikes that began in early 2022.
Increase in the number of problem banks
The FDIC also reported an increase in the number of banks on its Problem Bank List. These banks are at risk of insolvency due to various financial weaknesses. However, the FDIC emphasizes that the number of problem banks remains within the historical range seen during non-critical periods.
The federal agency says the US banking system is not in immediate danger. However, it recognizes the ongoing challenges posed by inflation, volatile stock markets and geopolitical tensions. These factors could affect banks’ ability to lend, generate profits and maintain sufficient liquidity.
Additionally, certain loan portfolios, such as office property and credit card portfolios, require close monitoring due to potential deterioration. The FDIC will continue to monitor these issues along with funding pressures and declining profit margins.
