Massive unrealized losses put more than 700 banks in the US at risk, says Fed.
A public release, represented by the Federal Reserve Bank of Kansas City, discusses the growing risks of instability across certain banks under the impact of rising rates.
Data indicates that 722 American banks have suffered ‘unrealized losses exceeding 50% of capital.’ The high level of unrealized losses put banks at ‘significant safety and soundness risk.’
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Banks Under Pressure
The Federal Reserve has reported that those banks have self-reported massive unrealized losses, indicating a potentially significant risk. This indicates that the value of certain assets held by these banks has decreased to a point where, if sold, they would generate a loss of more than half of the bank’s capital, resulting in a weakened financial position for the institution.
Alternatively, the Fed has revealed that American banks have taken measures to mitigate further losses caused by the impact of rising interest rates.
The report highlights that banks have adopted several strategies, including adjusting the accounting treatment of their securities, hedging interest rate risk, and retaining more tangible capital, to avoid further losses.
However, despite these measures, the report suggests that the Federal Reserve’s own interest rate hikes have been the primary catalyst for the losses suffered by these banks.
According to the report, the current unrealized losses have left certain banks facing difficult decisions. The rising interest rate environment is causing financial risks to increase for many banks, particularly those with investment portfolios holding significant unrealized loss positions.
As rates continue to rise, the use of investment portfolios as a source of liquidity is becoming increasingly limited. Given higher-than-anticipated deposit outflows and limited contingency funding, some banks may need to make difficult choices, such as relying on higher-cost wholesale funding or reducing lending.
As the Federal Reserve prepares for its upcoming Federal Open Market Committee (FOMC) meeting, it faces another challenging decision.
Recent consumer price index (CPI) data released on Wednesday indicates that inflation has dropped to 4.9% for the tenth consecutive month. While this may present a positive sign, experts have noted that it still remains above the Federal Reserve’s long-term target of 2%.
Bank Instability and Cryptocurrency Market Dynamics
The interplay between bank instability and the crypto market is complex and multifaceted. Financial experts and crypto analysts suggest, however, that bank turmoil could drive up demand for cryptocurrencies.
On the other hand, it potentially leads to increased regulatory scrutiny, reduced liquidity, and broader market volatility.
Bank instability can cause broader market volatility and impact the cryptocurrency market. If investors are uncertain about the future of the financial system, they may be less likely to invest in riskier assets like cryptocurrencies.
Investors often seek out safe-haven assets during bank instability to protect their portfolios from potential losses.
These safe haven assets typically include gold rather than risk assets like cryptocurrencies. This can lead to a drop in demand for cryptocurrencies and a decrease in prices.
If banks are struggling, regulators may be more inclined to crack down on other financial institutions to prevent broader systemic risks.
This could lead to increased scrutiny of the cryptocurrency market as regulators try to prevent cryptocurrencies from being used for money laundering or other illegal activities. This increased scrutiny can dampen investor sentiment and drive down cryptocurrency prices.
Another issue is the reduced liquidity in the overall financial system, making it harder for people to buy and sell cryptocurrencies. This can lead to lower demand for cryptocurrencies and a price drop.
Bitcoin experienced a surge above $28,000 in response to the live inflation data earlier this week. However, the rally was short-lived as the cryptocurrency’s value dropped below $27,000. At present, Bitcoin is trading at $26,800.
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