The Federal Deposit Insurance Corporation (FDIC) has revealed a troubling trend: unrealized losses in the US banking system are climbing once again.

In its latest Quarterly Banking Profile report, the FDIC notes that banks now face over half a trillion dollars in paper losses on their balance sheets, primarily due to their exposure to the residential real estate market. These unrealized losses, the gap between the purchase price of securities and their current market value, are becoming a significant burden.

While banks can hold onto these securities until they mature without marking them to market on their balance sheets, these unrealized losses can turn into a major liability when banks need cash.

“Unrealized losses on available-for-sale and held-to-maturity securities soared by $39 billion to $517 billion in the first quarter. The surge was driven by higher unrealized losses on residential mortgage-backed securities, a result of rising mortgage rates in the first quarter. This marks the ninth consecutive quarter of unusually high unrealized losses since the Federal Reserve started hiking interest rates in the first quarter of 2022,” the FDIC reported.

The FDIC also highlighted a rise in the number of lenders on its Problem Bank List last quarter. These banks are teetering on the brink of insolvency due to various weaknesses.

“The number of banks on the Problem Bank List, those with a CAMELS composite rating of ”˜4’ or ”˜5’, rose from 52 in the fourth quarter of 2023 to 63 in the first quarter of 2024. This figure represents 1.4% of all banks, a range considered normal for non-crisis periods, typically between 1% and 2%. The total assets held by problem banks increased by $15.8 billion to $82.1 billion during the quarter,” the FDIC stated.

Despite these concerning trends, the FDIC assures that the US banking system is not in imminent danger. However, it warns that ongoing inflation, fluctuating market rates, and geopolitical issues continue to exert pressure on the industry.

“These challenges could impact credit quality, earnings, and liquidity for the industry. Additionally, deterioration in specific loan portfolios, particularly office properties and credit card loans, remains a concern. These issues, combined with funding and margin pressures, will continue to be areas of focus for the FDIC’s supervisory efforts,” the report concluded.