Banks, bad debts and unrealized losses

JPMorgan Chase & Co., Citigroup, Wells Fargo and Bank of America are expected to report a combined $5.3 billion in net charge-offs for the third quarter, more than double the figure from a year earlier, Bloomberg reported Wednesday

A few billion in bad debts, it could get worse:


Calling declining bond values “unrealized losses” is somewhat misleading. More like “low return investments”. The banks maybe made some poor investment choices resulting in low returns. But the returns are still positive (at least before inflation). There is only a “loss” if the banks are forced to sell.

1 Like

@laffisloon the whole point of a run on the bank is that it could force the bank to sell assets that it did not plan to sell. The bank does not “mark to market” a bond that it declares that it plans to hold to maturity. But the market price may be much less than the book price (par if held to maturity) if the bond was bought when yields were lower than they are today. A forced sale will realize this loss.

That’s what deep-sixed Silicon Valley Bank, even though its book of long-term Treasury bonds had zero default risk.


It’s what happened to some UK pension funds last year:

1 Like

I will point out that the Bank Term Funding Program (BTFP) Federal Reserve Board - Bank Term Funding Program allows banks to borrow the full value of bonds from the Fed, rather than having to sell at a large discount. Here are the terms and conditions for the program:

BTFP was put into place after the SVB failure. If it had been in place before SVB and SVB had chosen to take advantage of it, it would have prevented the run on SVB. On the downside for SVB, although it would have prevented the immediate failure due to the run, it likely would have resulted in SVB being unprofitable for years, so SVB shareholders still would have been significantly impacted.



Right. A run on the bank would doom some banks. A bank is vulnerable any time their long term average coupon is lower than the market rate. Reserves buffer some of the run on the bank, but if large enough the bank is doomed. FDIC protects deposits, and so withdrawing from one bank and depositing into another bank makes no sense. This makes runs on the bank less likely, unless a bank has unique characteristics like SVB.

Also, BTFP (see aj485’s post above) helps avoid bank failures by giving banks more financing options. Shareholders might suffer losses, but depositors are safe.


It may be even worse “now”, well, maybe not literally now, but over 2024 through 2026, depending on what happens to rates during that period. Many folks expect rates to remain higher, and even after short rates start declining, they expect long rates to remain “normal”. Normal in this context means not zero in real terms, perhaps 2 or 3 percent in real terms, so 4 to 5 percent in nominal terms. And when some commercial real estate has to begin refinancing their loans, some of them will have a collateral value too low, so they may opt to “walk away” from the property. That essentially means that the bank will own it, but practically speaking, banks aren’t real estate companies, so they are forced to sell it for a loss to get it off their books. So, there could easily be properties with a $100M loan that are only worth $50M in a distressed sale such as this, and the bank will have to close that $100M loan with only $50M of proceeds. This is entirely outside of the banks holding 2-3% bonds with prevailing rates at about 5% causing those bonds to be trading at substantially lower values. Bad confluence of events for many banks.


This is an interesting problem.

@Divitias thanks

My own thoughts the bad debt $1.7 tr and banking deposits leaving for better yield, bank deposits were not used to that extent to create the loans. The prior system of using deposits was different.

The securitization of debt spreads the risk. The part of the debt that is bad is mostly commercial loans.

I have serious doubt we face a major recession. I think US manufacturing production soars next year instead. The does not preclude a bank or two failing. That does not preclude another retail store chain failing. That does not preclude some other shifts in the US economy.

I do see other allies particularly in Central Europe having more of a recession if not already.