‘The general public has no idea the banks are already insolvent entering a nightmare liquidity scenario in October’

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Study Finds 75 Percent of U.S. Banks Didn’t Hedge Interest Rate Risk; Unrealized Losses on Securities $516 Billion at End of First Quarter 

A group of academics have conducted a study that found that during the fastest pace of Fed interest rate hikes in 40 years, the majority of U.S. banks failed to hedge their interest rate risk. The report’s findings include the following:

“Over three quarters of all reporting banks report no material use of interest rate swaps.”

“Only 6% of aggregate assets in the U.S. banking system are hedged by interest rate swaps.”

“Banks with the most fragile funding – i.e., those with highest uninsured leverage — sold or reduced their hedges during the monetary tightening. This allowed them to record accounting profits but exposed them to further rate increases. These actions are reminiscent of classic gambling for resurrection: if interest rates had decreased, equity would have reaped the profits, but if rates increased, then debtors and the FDIC would absorb the losses.”

The use of the phrase “classic gambling” to describe 75 percent of the U.S. banking system by highly credentialed academics might be something that the U.S. Senate Banking Committee might want to hold a hearing about with some sense of urgency.

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Real Estate Crisis Looms, Posing a Threat to American Banks

Regional and community banks, which have heavily invested in commercial real estate, now face risks as the Federal Reserve raises interest rates. With rising rates, banks must offer higher deposit rates to retain customers, reducing the funds available for lending and absorbing loan losses. As office vacancies surge in major cities, real estate investors struggle to refinance debt, leading to defaults and losses for lenders. This situation threatens the commercial real estate market and the banking system, causing concerns among industry experts.

Taxpayers Are Bailing Out Federal Reserve Member Banks

Taxpayers are unknowingly bailing out Federal Reserve member banks. Historically, the central banking system generated profits and contributed to the U.S. Treasury. However, a shift has occurred due to sharp rate hikes. The interest expenses the Fed now faces outweigh its earnings, accumulating nearly $93 billion in cash operating losses since September 2022. Rather than assessing member banks for these losses, the Fed is borrowing to cover them, adding to the consolidated federal debt. This alarming trend is escalating, with several district banks teetering on insolvency, raising concerns about the growing financial burden on taxpayers.


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