You’ve surely seen the figure by now: US banks were sitting on $620.4 billion in unrealized losses at the end of 2022. And that was actually down 10% from Q3.

Those are paper losses, mind you. With an emphasis on “paper.” The split was $341 billion across HTM portfolios and $280 billion in AFS books.

In light of recent events, this has become a contentious, multi-faceted debate. So, rather than make claims about what isn’t a problem, it’s far safer to say what is. It’s a problem when you have large unrealized losses and all your depositors come looking for their money at the same time.

Fortunately, banks which run into trouble can avail themselves of emergency Fed facilities, where temporarily impaired assets can be pledged at par for liquidity. That’s not ideal, but it’s better than seeing your bank collapse.

Well, if you’re bothered by lenders’ unrealized losses, don’t look at their lender’s paper cuts, which sum to $1.08 trillion for 2022.

“The increase in market interest rates across the yield curve during 2022 drove an unrealized loss position for the domestic portfolio,” the New York Fed said Tuesday, in its annual report. The split was $673 billion for Treasurys and $408 billion for MBS holdings.

The disparity between the market value and book value of the Fed’s holdings sat at ~13% of par at the end of last year. Obviously, those losses will “go away” over time, and are immaterial for the Fed, but they make for “good” headlines.

Speaking of immaterial losses that sound scary to casual observers, you’ll recall that the Fed started to go “broke” late last year, when remittances due to the Treasury (so, what the Fed would, in “better” times, hand its Ponzi partners across the street) were suspended for most reserve banks. In short: Interest expenses began to exceed SOMA income as rates were ratcheted higher.

The Fed’s operating losses were guaranteed to pile up as the hikes proceeded. And so they did.

At the end of 2022, the Fed recorded a deferred asset of $16.6 billion. Net income has to turn positive again so the deferred asset can be reduced and eliminated. At that point, remittances to Treasury will start up again.

If you’re wondering about the time frame on that, it’s indeterminate. “SOMA net income is projected to decline notably during the portfolio reduction phase through 2024,” the Fed said. The mechanics of this aren’t complicated. Reserve balances and cash parked in the RRP get more expensive as rates rise, and interest income from the Fed’s portfolio falls as the size of that portfolio is trimmed.

Eventually, when rates decline, the Fed’s “loss” will diminish. Between now and then, though, the red ink will accumulate. If rates stay where they are through year-end, the Fed would be sitting on a net income loss of almost $90 billion for 2023. That figure could swell to $137 billion if rates were 100bps higher.

The Fed assumes rates will be 2.38% over the long run, in which case net income would flip positive in 2025.

Whatever the case, the annual report was clear enough. “The projections for negative net income suggest that remittances to the Treasury will be suspended for some time, and that the deferred asset recorded on the Fed’s balance sheet reflecting the accumulated net loss will continue to grow,” the Fed said.

Again: Remittances will only start up again once that deferred asset is extinguished, which suggests it could be quite a long time before the payouts resume. If US politicians were vindictive, and prone to trafficking in nonsense for the purposes of riling up an already restive populace, the optics for the Fed of ongoing operating losses could be very challenging on Capitol Hill.

Fortunately, US lawmakers are known for being eminently rational. And Jerome Powell is a Republican.