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Study Finds 75 Percent of U.S. Banks Didn’t Hedge Interest Rate Risk; Unrealized Losses on Securities $516 Billion at End of First Quarter
wallstreetonparade.com ^ | September 6, 2023 | Pam Martens and Russ Martens

Posted on 09/09/2023 3:40:19 PM PDT by elpadre

A group of academics have conducted a study that found that during the fastest pace of Fed interest rate hikes in 40 years, the majority of U.S. banks failed to hedge their interest rate risk. The report’s findings include the following:

“Over three quarters of all reporting banks report no material use of interest rate swaps.”

“Only 6% of aggregate assets in the U.S. banking system are hedged by interest rate swaps.”

“Banks with the most fragile funding – i.e., those with highest uninsured leverage — sold or reduced their hedges during the monetary tightening. This allowed them to record accounting profits but exposed them to further rate increases. These actions are reminiscent of classic gambling for resurrection: if interest rates had decreased, equity would have reaped the profits, but if rates increased, then debtors and the FDIC would absorb the losses.”

The use of the phrase “classic gambling” to describe 75 percent of the U.S. banking system by highly credentialed academics might be something that the U.S. Senate Banking Committee might want to hold a hearing about with some sense of urgency.

Not to put too fine a point on it, but this is the year in which banking regulators were left scratching their heads at the dizzying speed at which multiple banks collapsed. In the span of seven weeks this spring, running from March 10 to May 1, the second, third, and fourth largest bank failures in U.S. history occurred. In order of size, those were: First Republic Bank (May 1), Silicon Valley Bank (March 10) and Signature Bank (March 12). The largest bank failure in U.S. history, Washington Mutual, occurred in 2008 during the financial crisis.

(Excerpt) Read more at wallstreetonparade.com ...


TOPICS: Business/Economy; News/Current Events
KEYWORDS: banking; banks; interest
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1 posted on 09/09/2023 3:40:19 PM PDT by elpadre
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To: elpadre

Money isn’t free?


2 posted on 09/09/2023 3:42:46 PM PDT by blackdog ((Z28.310) My dog Sam eats purple flowers.)
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To: elpadre

excerpted:

“...As a result of this lack of hedging, according to the FDIC’s quarterly report for the quarter ending March 31, 2023, unrealized losses on securities at U.S. banks stood at the staggering sum of $515.5 billion....”

Our national debt is around $32 trillion which takes more than $600 billion to service. What the hell is going on????


3 posted on 09/09/2023 3:45:51 PM PDT by elpadre
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To: elpadre

I guess risk management went out the window. Again. 2008 redux anyone?


4 posted on 09/09/2023 3:45:57 PM PDT by WashingtonSource
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To: WashingtonSource

Don’t know what to make of this. If banks match tenors of assets and liabilities (smaller banks in particular) they may not need derivatives (swaps) to hedge? Some institutions get into trouble trying to use derivatives and structured funding to speculate on rates or to cover short/long-funded positions.


5 posted on 09/09/2023 3:50:54 PM PDT by vrwconspiracist (The Tax Man cometh)
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To: elpadre

I didn’t know Bankers live and Colorado Bankers life are in rehabilitation. Colorado life annuity holder will be lucky if they get 60% of their contracts back.


6 posted on 09/09/2023 3:51:24 PM PDT by Fido969 (45 is Superman! )
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To: vrwconspiracist

Hedging should only be used to protect against risk.


7 posted on 09/09/2023 3:52:21 PM PDT by Fido969 (45 is Superman! )
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To: elpadre

You pay your depositors close to zero percent interest and invest in 10-15 year government bonds at 1.5 -2.00%. Then we have 4% inflation and those pesky depositors want to be compensated for that inflation and earn at least 4% on their money market accounts and CDs at the bank. And U.S. short term bonds are paying about 5.0% and money market accounts offered by brokerage houses are paying 4.5% The bank will have a problem magnified a 1000 fold as current market rates on those 10-15 year bonds are now paying 4.5% and yours are paying 1.5%-oops. Huge losses on your bond porfolio.

One of the first rules in banking and persona finance as well. Match the maturity of the interest you pay your depositors to the interest you receive on your loans.


8 posted on 09/09/2023 3:58:37 PM PDT by Maine Mariner
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To: elpadre

Don’t worry, everything will be fine, the banks won’t run out of money, We will just print more as we need it...


9 posted on 09/09/2023 4:02:07 PM PDT by eyeamok
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To: Maine Mariner

The problem in residential mortgage banking is that interest rate risk is one-sided in favor of the customer, not the bank. The customer can always refinance their mortgage when interest rates drop, but the bank doesn’t have that same option if interest rates rise.


10 posted on 09/09/2023 4:07:49 PM PDT by Alberta's Child (“Freedom is just another word for nothing left to lose.”)
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To: Alberta's Child

Yes, excellent observation and that also presents a problem for bankers. The banks in California had problems since most of their investments were in those bonds paying 1.5% interest.


11 posted on 09/09/2023 4:10:16 PM PDT by Maine Mariner
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To: elpadre
Frickin' geniuses. The rate rises were reasonably well telegraphed, even months in advance. Not just as to direction, but as to size. And just in terms of "market savvy", it was certainly a distinct possibility that the Fed was not going to gingerly raise .25 at a time every 6 months. The markets had gone into paroxysms at even the hint of rate hikes for the past decade, but none of these guys, none of them thought the party would ever end. Plus the mathematics of the situation....when you are sitting at (eg; lending at) .5% yields and the Fed raises to a mere 1%, still crazy historical lows, rates have doubled against you and you'll be obliterated. It's a hell of a lot different than if you are lending at 3% and the Fed goes to 3.75%. And none of these so-called gooroos saw it coming or even clumsily got out of the way when it was clear it WAS coming.
12 posted on 09/09/2023 4:28:07 PM PDT by Attention Surplus Disorder (The Democrat breadlines will be gluten-free. )
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To: elpadre

These are the same bankers who require my industry to hedge commodity price risk aggressively.


13 posted on 09/09/2023 4:31:47 PM PDT by FlyingEagle
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To: elpadre

I am convinced, far beyond politics, its all a complete scam. I’m still not certain how or what’s holding it up, but the whole economy is a total illusion. The annual federal deficit is now nearly $1 trillion dollars ($918 billion). Debt service alone is now $600 billion. And the Feds keep spending like drunken sailors. How does this not collapse? How has it not yet collapsed? Whats is holding everything up? It’s a complete mystery to me.


14 posted on 09/09/2023 4:53:22 PM PDT by Obadiah
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To: Obadiah

Obadiah, the deficit for FY 2023 is $2+ Trillion…and nobody in DC gives a damn. We are heading to a $40 Trillion debt and a $2 trillion annual debt service cost, and nobody in DC gives a damn.


15 posted on 09/09/2023 5:03:47 PM PDT by Night Hides Not (Remember the Alamo! Remember Goliad! Remember Gonzales! Come and Take It!)
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To: elpadre

They are talking about interest rate risk. So they have a 10 yr bond and the bond only pays 4%. Right now the value of the bond is lower because you can easily get a 5% bond. But you don’t really need to care unless you are forced to mark to market and hit some arbitrary capital requirement. The reality is the fed makes up the arbitrary capital requirement. And it can (and does) give the bank credit for the purchased price up to the value of the bond. And that is why other banks are not going under. Also, banks are getting over 5.5% overnight rate from the fed. So they have no need to gamble on bonds.


16 posted on 09/09/2023 5:48:13 PM PDT by poinq
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To: elpadre

Remember, the Fed owns more mortgaged backed securities than just about anyone. I wonder how far under water those things are?


17 posted on 09/09/2023 7:02:55 PM PDT by Vermont Lt
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To: elpadre

Most banks, especially smaller ones, were dumping their paper as soon as the ink dried. There isn’t much good money in servicing loans.


18 posted on 09/09/2023 7:04:17 PM PDT by Vermont Lt
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To: Alberta's Child
The customer can always refinance their mortgage when interest rates drop, but the bank doesn’t have that same option if interest rates rise.

Unless the customer took out an ARM.

In my case, I took out a special relocation ARM that was 5/15 @ 2%. That's a five-year fixed rate at 2% and then adjustable each year for the next 10 years.

When the five years was up, the loan adjusted upwards by 2% (the maximum allowed per year). I was able to do a loan modification to convert to a 10-year fixed rate at 2.625% in March of 2020 (the beginning of COVID-19).

Today, the rates are much higher than they were when most mortgages were taken out so the customer doesn't really have the option to refinance to a reduced rate. They may try to convert an ARM to a fixed rate to stop the growth, but they will still be locking in a much higher rate than a conventional loan would have charged them if they weren't attracted to the lower introductory rates of the ARMs.

-PJ

19 posted on 09/09/2023 7:14:43 PM PDT by Political Junkie Too ( * LAAP = Left-wing Activist Agitprop Press (formerly known as the MSM))
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To: Night Hides Not

Staggering.


20 posted on 09/09/2023 8:40:55 PM PDT by Obadiah
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