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Banks ’Unrealized losses’ will cut lending further

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(LPAC) — Following a two-month drop in bond markets in which interest yields have suddenly risen between 1.25% and 2.5% depending on the class of bonds, the Wall Street Journal reported July 8 that "Recent Fed data showed that U.S. banks have seen billions in unrealized gains from their securities portfolios evaporate as interest rates rise.... Gains in these portfolios fell from more than $40 billion at the beginning of the year to around $6 billion. Banks won’t record losses for these assets but they will take a hit to capital levels."

The larger U.S. banks already have capital ratios in the low single digits, 3-5% in real terms, meaning they are leverage between 20:1 and 33:1. Further drops in capital from bond market losses — which will continue — means these banks will lend even less to business and industry. Their lending is well below its 2007 level as it is.

One bank, the Federal Reserve, has taken unrealized losses — meaning losses in securities that the bank is still holding — of over $200 billion in its $3.3 trillion portfolio during May and June. They have largely wiped out the "unrealized gains" Fed Chairman Ben Bernanke was bragging about to Senate Banking Committee in early May.

The Fed, however, will go right on printing money and pouring it out to the big banks for securities purchases and liquidity loans until the bubble bursts. [pbg]