The Federal Deposit Insurance Corporation (FDIC) recently released its Risk Review for 2023, detailing a substantial increase in unrealized losses–$617.8 billion in the last quarter of 2022 and $515.5 billion in the first quarter of 2023–driven in large part by “declines in medium- and long-term market interest rates.” If banks face a situation where they need liquidity and therefore have to sell investments at a loss, the depreciation of their portfolios could be a deathblow that renders many financial institutions insolvent.
While several asset quality indicators, such as the delinquency rate and nonconcurrent loan rate, remained favorable, the reality is that the banking sector is not in good shape–and declining macroeconomic conditions have exacerbated risk factors. Rising interest rates, coupled with inflation, have simultaneously affected bank balance sheets and consumer debt and expenditures. However, there is an important silver lining in the report: Community banks have fared much better than their larger counterparts–and helped sustain small business lending.
