Graduate Intern Henry Caplan releases research note on Bank balance sheets.
Unrealized Losses on Banks’ Balance Sheets: According to the FDIC, banks are currently carrying approximately $517 billion in unrealized losses on their balance sheets, an "unusually high" amount reported in May. 1 This substantial figure primarily results from banks purchasing government bonds, such as Treasurys and mortgage-backed securities, during the pandemic when interest rates were low. Most banks have not realized these losses as they have classified these assets in a hold-to-maturity category. As such, these investments are not marked to market daily. However, banks may be forced to sell these securities to address liquidity needs, similar to the situation faced by Silicon Valley Bank.
Commercial Real Estate Losses: Economists estimate that banks hold between 40% to 50% of all commercial real estate debt outstanding, with delinquency rates on the rise. This situation is particularly impactful for small and regional banks, which have a significantly higher proportion of commercial real estate loans relative to their total assets compared to larger banks.
Profits from Lending: Banks are experiencing pressure due to a plateau in interest rates. Despite increased profits from lending compared to the post-pandemic period, growth is beginning to cool as the economy adjusts to higher interest rates. This deceleration is mainly due to customers moving their funds from non-interest-bearing accounts to interest-bearing accounts and products. Liquidity for Regional Banks: Regional banks remain a vulnerable segment of the U.S. banking system, raising concerns among investors. The primary indicator of a regional bank’s health is its liquidity. Larger banks have managed to maintain higher liquidity levels, as mandated by the Treasury's stress test requirements, thus pulling ahead of their regional counterparts.
Credit Card Delinquencies: While the economy continues to grow, the rate of growth is slowing, revealing some vulnerabilities, particularly in consumer health. An increasing number of people are falling behind on their credit card payments, with delinquencies appearing in bank earnings reports. Analysts expect a modest uptick in delinquency rates for Q2.
Investment-Banking Fees: Investment banking fees are expected to have risen year over year in Q2. In Q1, banks' investment banking divisions recorded one of their best quarters since the Federal Reserve's interest rate hikes began slowing corporate deal-making in 2022. However, many banks have yet to see a return to the strong deal volumes of 2021, when companies capitalized on low rates for acquisitions and debt refinancing.