Bank close-up
In the wake of the surge in interest rates that is putting pressure on the financial system, more banks are reporting losses that amount to less than half of their capital, according to research by Dr. Rebel Cole, Lynn Eminent Scholar and professor of finance at Florida Atlantic University’s College of Business.
According to the U.S. Bank Investment Securities Unrealized Loss Screener, 50 banks had unrealized losses in their investment securities portfolios that exceeded at least 50% of their capital in the first quarter of 2024, a slight increase from the fourth quarter of 2023. Overall, the total unrealized losses for banks nationwide increased to $517 billion at the end of the first quarter of 2024 from $478 billion at the end of the fourth quarter of 2023.
“Republic First Bank is not the top bank on this list for the first quarter in over a year, but that’s simply because federal regulators shut it down in April,” Cole said. “The bank was most at risk due to unrealized losses in its securities portfolio relative to its total capital.”
The screener, part of Florida Atlantic University’s Banking Initiative, is a quarterly report that measures a bank’s risk exposure based on unrealized losses on its investment securities portfolio. To calculate the risk, Cole used the most recent available data from the Quarterly Cole Report, published by the Federal Financial Institutions Examination Council (FFIEC). The dataset contains financial information for 4,697 banks, and Cole narrowed it down to 997 banks with more than $1 billion in assets, calculated the unrealized losses on their investment securities, and compared those losses to the bank’s Common Equity Tier 1 Capital (CET1). This metric identifies banks with the highest risk from exposure. In most cases, banks that lose half of their CET1 capital are forced by regulators to take corrective measures, such as raising new capital or looking for a merger partner, and in the worst case scenario, such banks face closure by the FDIC.
Four banks had losses that exceeded their capital: Union City SVGS Bank had unrealized losses of 172.7%, Citizens ST Bank had unrealized losses of 121.4%, Green Dot Bank had unrealized losses of 108.6%, and First America TR had unrealized losses of 104%.
At the large banks on the list with capital of more than $10 billion, unrecorded securities losses exceed their capital: Charles Schwab’s unrecorded losses are 64% of its capital, USAA Federal Savings Bank’s unrecorded losses are 67% of its capital, and Bank of America NA’s unrecorded losses are 58%.
Rising interest rates are adversely affecting many banks’ balance sheets with respect to unrecorded securities losses.
“Second-quarter losses could be much larger as the yield on the 10-year Treasury note rose to 4.48% recently from 4.21% at the end of the quarter,” Cole said. “Smaller banks with less than $1 billion in assets face similar risks, with 22 banks with unrealized losses exceeding 100% of their capital and 275 banks with losses exceeding 50%.”
-FAU-