The Federal Deposit Insurance Corporation released its Quarterly Banking Profile for fourth-quarter 2016, so let's look at both quarterly and full-year data. I believe this quarterly report represents the balance sheet for the U.S. economy.
Conventional wisdom is that higher interest rates are positive for bank stocks as net income margins widen. I have been opining that this is not always the case, particularly when banks have not been careful with investment portfolios. The FDIC indicates that the banking system continues to face challenges: "Margin pressures have led some institutions to 'reach for yield' through higher-risk assets and extended asset maturities. Banks must manage their interest-rate risk, liquidity risk and credit risk carefully for industry growth to remain on a long-run, sustainable path. These challenges will continue to be a focus of supervisory attention."
The rise in longer-term interest rates resulted in a decline in market values of portfolio holdings. At the end of the third quarter, the market value of investment securities exceeded their book value by almost $60 billion. At the end of the fourth quarter, these gains evaporated to an unrealized loss of $20 billion.
Here's a portion of the FDIC Quarterly Banking Profile for the fourth quarter.
While the number of problem banks continued to decline, the number of FDIC-insured financial institutions fell to 5,913 down from 8,533 at the end of 2007. The number of problem banks fell to 123 vs. 76 at the end of 2007. The number of employees increased to 2.05 million but down 7.3% from 2.21 million at the end of 2007.