According to a February presentation published by the Federal Reservemore than 700 banks are exposed to significant security and solidity risks due to massive risks unrealized losses on their balance sheets.

Banks have self-reported unrealized losses in excess of 50% of their capital and have been taking steps to avoid further losses for months, according to the presentation titled ‘Impact of rising interest rates on certain banks and supervisory approach’.

“Banks with large unrealized losses face significant security and solvency risks. Securities are traditionally used for liquidity purposes; Today, the unrealized losses present some banks with difficult decisions,” noted the moderators – whose names have been blacked out. The report was presented by two people, one from the Federal Reserve’s Supervision and Regulation Division and the other from the Federal Reserve Bank of Kansas City.

The speakers also pointed out that the rise in interest rates is exacerbating the challenges for many banks.

“The rising interest rate environment increases the financial risks for many banks. We are concerned about banks that have large unrealized loss positions in their investment portfolios,” they wrote. “As interest rates rise, investment portfolios that have traditionally provided a source of liquidity will be further constrained.”

Also read: Former Dallas Fed President Robert Kaplan explains why the central bank needs to pause rate hikes

The speakers added that there were “greater-than-expected deposit outflows and limited emergency funding available,” which could prompt banks to make difficult decisions, including “relying on more expensive wholesale financing or cutting back on lending.”

Citing the troubled Silicon Valley Bank (SVB), the speakers wrote that the bank used the significant growth in deposits “to buy longer-term securities”. They added that SVB purchase yields are low due to “the interest rate environment and the longer portfolio duration”.

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