Bank Liquidity May Be Squeezed by Drop in Loan Market Value

Banks’ market-value losses on loans have reportedly been rising along with interest rates.

Ninety-seven percent of a sample of publicly traded United States banks reported that their loans’ market value was less than their balance-sheet amount as of Dec. 31, 2022, the Wall Street Journal (WSJ) reported Friday (April 7).

The declines have been driven by rising interest rates, which have also impacted the value of banks’ securities, according to the report.

But the market-value losses on loans are less well known than those on securities because the former must be calculated from publicly traded banks’ securities filings while the latter is counted industrywide by regulators, the report said.

The 435 banks included in the sample used for the WSJ report had $242 billion of unrealized losses on their loans. A year earlier, the same banks had loans whose fair value exceeded the carrying amount by $96 billion, per the report.

The declines in loan values could put pressure on banks’ earnings or liquidity and require them to pay higher rates for deposits, according to the report.

The Consumer Financial Protection Bureau (CFPB) released new rules March 30 that will broaden the data lenders — including both banks and non-banks — will need to collect as they decide who gets business loans.

Demographic, geographic and other data would be required to be collected and analyzed by lenders who issue more than 100 small business loans annually.

Days earlier, the CFPB said states could continue extending disclosure laws covering lending to businesses, as such state laws are not inconsistent with or preempted by the federal Truth in Lending Act.

“After analyzing public comments on its preliminary determination, the CFPB affirms there is no conflict because the state laws extend disclosure protections to businesses and entrepreneurs that seek commercial financing,” the CFPB said March 28.

It was reported on March 27 that regulators and banks are concerned about “shadow lending,” which includes credit issued by private equity companies, retirement funds and insurers.

A deeper investigation into the matter will mean determining where the risk ended up when it moved off banks’ balance sheets and the risk to banks from loans issued to buyout firms.