Stagflation Risk: Banks Face $500 Billion in Unrealized Losses Similar to Silicon Valley Bank Crisis

Banks Facing Significant Losses Amid Rising Interest Rates

Banks have encountered substantial losses due to the Federal Reserve’s aggressive interest rate hikes intended to combat inflation. These losses continue to pose a risk to the banking system, as several experts have indicated that ongoing issues stemming from the 2023 banking crisis threaten stability if economic conditions take a turn for the worse.

Lingering Effects of the Banking Crisis

More than two years after the collapse of prominent institutions like Silicon Valley Bank and First Republic, banks are still grappling with significant financial setbacks attributed to high interest rates. Experts express concern, particularly in light of potential economic policies that could trigger “stagflation”—characterized by rising inflation alongside stagnant growth. This scenario could further strain lenders operating under challenging conditions.

Unrealized Losses in U.S. Banks

Data from the Federal Deposit Insurance Corporation reveals that U.S. banks held approximately $482.4 billion in unrealized losses related to securities investments at the end of 2024. This figure represents an increase of $118 billion, or 32.5%, from the previous quarter. The losses peaked at $684 billion following the bank run on Silicon Valley Bank in March 2023. While further data for early 2025 is forthcoming, an increase in bond yields during April suggests that previous short-lived relief from losses may have evaporated.

The Risks of Unrealized Losses

Although unrealized losses do not appear on a bank’s income statement until assets are sold, these losses pose a potential threat to liquidity, as highlighted by financial experts. The situation can rapidly escalate in cases where depositors lose confidence in the stability of banks, leading to a rush for withdrawals.

The Fragility of the Banking System

Financial analysts warn that even minor negative news regarding any banks could spark a new crisis similar to the one experienced in March 2023. Observers are astonished that a crisis hasn’t occurred since then, given the precarious nature of many banks amid ongoing economic uncertainties.

Understanding the Impact of Interest Rates

The fluctuations in bank losses have been closely tied to the benchmark 10-year Treasury yield, which has experienced significant volatility in 2025. As long-term interest rates rise, the value of long-term assets such as U.S. Treasury securities and mortgage-backed securities declines. As the yield nears 5%, the banking system faces increasingly severe challenges, where higher rates not only aggravate existing losses but also threaten liquidity.

Market Risks and Investment Losses

Analysts estimate that unrealized investment losses could range from $600 billion to $700 billion if current rates persist. Many securities categorized as “held-to-maturity” are not intended for sale, meaning their fluctuating market values do not directly impact banks’ reported earnings but remain hidden variables in the financial statements. This lack of visibility can become problematic, especially if banks are compelled to liquidate those investments, necessitating a reevaluation of their whole portfolio at current market values.

The Consequences of Underlying Vulnerabilities

Experts suggest the current unrealized losses act like an anchor for banks, creating precarious financial positions. Losses on securities classified as “available-for-sale” do appear on financial statements but do not affect earnings until those assets are sold. The collapse of Silicon Valley Bank serves as a stark reminder of the consequences of such losses; it faced a swift downfall after announcing a significant loss on available-for-sale securities.

The Search for Higher Returns and Its Fallout

In the wake of historically low interest rates during the COVID-19 pandemic, banks sought higher returns by investing in longer-term securities, pouring over $2 trillion into various financial instruments. However, this strategy backfired when the Federal Reserve was compelled to hike interest rates dramatically to counter rising inflation, leading to substantial losses for banks heavily invested in long-duration securities.

Regulatory Oversight and Institutional Responses

Regulators initially underestimated the risks posed by interest rate exposure, but the fallout from the banking crisis has led to heightened scrutiny. While some lessons have been learned, many core issues remain in the industry. For instance, capital requirements often disregard unrealized losses on both securities and loans, while hedging strategies within many banks remain inadequate to mitigate these risks effectively.

The Current Economic Landscape and Future Implications

In the prevailing climate, where interest rates remain elevated, banks still carry the burden of accumulated losses from previous crises. Experts warn that a potential stagflation scenario could prolong high rates, exacerbating issues and increasing credit losses, particularly among lenders in technology and venture capital, where borrowers typically exhibit low earnings and coverage ratios.

The Vulnerability of Regional Banks

Higher investment losses could also precipitate a crisis in commercial real estate, putting additional pressure on banks—especially regional and super-regional institutions with assets ranging from $10 billion to $200 billion. Many of these banks are publicly traded, with a significant number of their depositors holding amounts exceeding the FDIC’s insurance cap of $250,000, making them vulnerable to bank runs in the face of unrealized losses.

A Potential Breaking Point

Experts describe the current situation as a “nightmare scenario,” with the banking sector sitting on a “tinderbox” of vulnerabilities. The potential for a renewed banking crisis looms larger with every passing day, especially amid a backdrop of economic uncertainty and persistent losses.

Concluding Thoughts

Overall, the banking landscape remains precarious, with the potential for a new crisis lying just beneath the surface. It would only take a single trigger—such as unfavorable news regarding a major bank—to ignite a broader collapse.