Partial Effects of Fed Tightening on U.S. Banks’ Capital
50 Pages Posted: 26 Apr 2023
Date Written: April 19, 2023
Silicon Valley Bank (SVB) failed on March 10, 2023, from a depositor run set off by massive unbooked securities losses that became salient only when the firm filed for a stock issue intended to replace some realized, but previously un-noticed, capital losses. The unprecedented increase in market interest rates associated with the Fed’s 2022 inflation-fighting raises the question of whether SVB’s situation reflects a broader problem in the banking system. As of 2022 Q4, we find $623 billion of before-tax security losses unbooked in Common Equity Tier 1 capital (CET1) and $466 billion of unbooked interest-rate-related loan losses. After tax, these unbooked losses ($482 billion and $362 billion, respectively) represent 40% of CET1 and are distributed relatively evenly across bank size classes. We did not measure some possibly offsetting effects on bank capital ratios, but we strongly suspect they are too small to offset these large asset losses. If all unbooked losses were fully reflected in bank balance sheets, roughly half of banks, holding roughly half of all bank assets, would not meet their minimum regulatory capital requirements. This appears to be a major cause for regulatory and depositor concern.
Keywords: Bank Stability, Interest Rate Risk, Capital Impairments, Regulation
JEL Classification: G21, G28
Suggested Citation: Suggested Citation