It was exactly six months ago when the US regional banking crisis started to dominate news headlines, triggering concerns over the global financial system. Fast forward to today, the panic has mostly subsided, thanks in large to the financial might of the Federal Reserve, which acts as a lender of last resort to the banks.
There's one important figure we have to point to. $558 billion — that is the total amount of unrealized losses on securities held by US banks in the second quarter, according to banking data compiled by the Federal Deposit Insurance Corporation. That is unless they're forced to sell their assets during a bank run, more so if most of their deposits are uninsured, which is exactly what happened with Silicon Valley and First Republic, which triggered the whole panic back in March.
This then forced banks to borrow more from the Fed to ensure they had enough money, and at rates much higher than they used to be. The result? A decline in net interest margins for the last three quarters .The decline in profitability certainly played a key role in the banking collapses in the spring, as it destabilized the banks at a time when the value of the debt on their balance sheets had also fallen sharply.
"As a result of rising interest rates, the market value of the average US bank's assets is about 9% lower than its value on paper. Overall, the US banking system accumulated $2.2 trillion in these unrealized losses over the past year. Ten percent of banks have had larger unrealized losses than Silicon Valley Bank," according to the study, which looked at more than 4,800 US banks to gauge their exposure to the risks that caused SVB to fail.
Since then, the ratings agencies have only applied further pressure. In early August, Fitch started off by downgrading its rating of US government debt to AA+ from AAA, citing a likely deterioration in the public finances over the next three years.
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