AND SO IT BEGINS…BANK FAILURES: $517 Billion in Unrealized Losses, $9.3 Billion in Bad Loans Will Spark a Crisis

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The FDIC Quarterly Banking Profile for the first quarter of 2024 provides insights into the financial health of FDIC-insured institutions. Here are some key points:

  • Net Income: The banking industry rebounded in the first quarter, with net income increasing by 79.5 percent from the prior quarter. Community banks reported a quarterly increase of 6.1 percent in net income.
  • Net Interest Margin: The industry’s net interest margin declined to 3.17 percent due to increased funding costs and declining asset yields.
  • Unrealized Losses: Unrealized losses on available-for-sale and held-to-maturity securities rose by $39 billion to $517 billion in the first quarter. Higher unrealized losses on residential mortgage-backed securities drove this increase.
  • Loan Growth: Total loans declined by $35 billion (0.3 percent) in the first quarter. Community banks, however, saw more robust loan growth.
  • Asset Quality: While most asset quality metrics remained favorable, there was material deterioration in commercial real estate (CRE) and credit card portfolios.
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It’s essential to note that asset quality metrics did show some “material deterioration” in banks’ credit card and commercial real estate portfolios during that period1. Here are additional details:

  • Commercial Real Estate (CRE) Exposures: More than 60 of the largest banks in the country are at increased risk of failure due to their CRE exposures. Sixty-seven banks have exposure to commercial real estate greater than 300% of their total equity. This excess exposure puts the banks at greater risk of failure.
  • Risk Factors: Commercial properties are selling at serious discounts in the current market, which impacts banks’ CRE portfolios. Banks may eventually be forced by regulators to write down those exposures.
  • Specific Banks: Flagstar Bank and Zion Bancorporation are the two largest banks with excessive exposure to commercial real estate. Flagstar Bank’s total CRE exposure was 553% of its total equity, while Zion Bancorp had a total CRE exposure of 440% of its total equity.
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