The US banking sector is built on an unstable foundation of bond assets that no longer hold their value, says an expert.
A new report by Moody's US ratings agency has revealed that some of the biggest banks have a combined $650 billion in unrealized losses — a term for the declining value of assets which have not yet been sold.
Financial expert Aquiles Larrea told Sputnik that fluctuating asset values are not unusual or a problem until the banks are forced to sell these holdings at a loss.
"The thing to be scared about is when they start taking those realized losses because there's a run on the bank or there's forces beyond their control," Larrea warned.
He pointed to the collapse of the Silicon Valley Bank (SVB) in March of this year as an example of how asset portfolios could go horribly wrong.
"There was a situation where the bank was forced to sell assets and the valuation of the company and they eventually went under," Larrea stated. "They're bordering on criminal because these guys were also taking money for their bonuses before the bank went under," he added.
The financial analyst said the trade in assets such as the SVB's ill-fated US Treasury bonds, which lost value when the Federal Reserve raised interest rates, was huge.
"People forget bonds will go up and down on a daily basis. It's a much bigger market than the stock market. It dwarfs the stock market as a whole," Larrea stated. "But you have to remember, they do go up and down. And if at any given time, if there was a run on the bank, that's when your money would be affected most," he added.
"Let's just take the simplest example: A $1,000 bond all of a sudden is a $700 bond. That's a huge loss. That's a 30 percent drop. So banks assets have gone down 30 percent, which is not unheard of. That has happened. But generally, the banks don't survive," he concluded.
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