while I'm not exactly trying to do a @denlillaapan impression, he does have a pretty good way of delivering commentary on financial articles...of which this is but a pale comparison
This was something I kept hearing in 2023, but maybe haven't heard anyone talk about lately:
Banks still have a lot of unrealized losses on their balance sheets.
The chart shows a slight amelioration in Q1 of unrealized losses on banks’ securities holdings, falling to $413.2 billion — but the FDIC caveated: “However, increases in longer-term interest rates since the end of the first quarter would likely reverse most of these improvements in unrealized losses if measured today.” Adding in unrealized rate marks on loans — which are often simply ignored in the literature due to data-scraping challenges, but are readily available in 10-Ks and 10-Qs — likely puts unrealized duration losses in the banking system above the $1 trillion mark [i].
And yet the system keeps chugging along, remarkably.
The first-order assessment of banks’ persistent, large unrealized duration losses over the past three years should be: The bank balance sheet remains a remarkable piece of technology for bearing interest rate risk.
The supposition here is that "Assets on viable banks’ balance sheets do have different values than mark-to-market prices would suggest."
If a bank has good cash-flow and a stable business, holding crappy bonds to maturity is less of a risk. They'll get their money.
Using mark-to-market prices would imply banks are upside down on their spread business. In fact, that business is remarkably stable.
If a bank keeps making money, it doesn't matter if their underwear are dirty (I'm not sure this is the correct analogy...forgive me).
Indeed, many banks had levels of unrealized losses comparable to those of the failed banks and escaped failure.
But the difference was many of them had stable cashflow.
SVB failed because it was underwater on its bonds AND because it's main source of revenue (new fundraisings by VC companies and investor allocations) dried up pretty badly. Silvergate and Signature had just lost it's primary customer (FTX)
All else equal, unrealized interest rate losses on bank balance sheets weigh on banks’: risk-taking capacity, share price, resilience to contagion effects, and ability to consummate mergers or raise capital. But when they become a life-or-death problem is contingent on the macroeconomic environment and the business model of the bank in question. The primary question is: Is the bank still investable?