A new Federal Deposit Insurance Corporation (FDIC) report discovered that the banking sector is still grappling with ballooning unrealized losses, a high number of "problem" banks, and various challenges that could worsen from high inflation and interest rates.

The U.S. financial regulator released the findings of the "FDIC Quarterly Banking Profile First Quarter 2024" report on May 29. Officials confirmed that unrealized losses on available-for-sale and held-to-maturity securities rose by $39 billion to $517 billion. This, the report noted, represented the ninth consecutive quarter of "unusually high unrealized losses" since the Federal Reserve started raising interest rates in March 2022.

An increase in unrealized losses on residential mortgage-backed securities accounted for most of the January-March jump.

The FDIC report further revealed that the number of problem banks totaled 63 in the first quarter, up from 52 in the fourth quarter of 2023. They represented 1.4 percent of total U.S. banks, "which was within the normal range for non-crisis periods of one or two percent of all banks."

These banks appeared on the "Problem Bank List" because they contained a CAMELS (Capital adequacy, Assets, Management capability, Earnings, Liquidity, Sensitivity) composite rating of "4" or "5."

CAMELS is the FDIC's 1-5 rating system, which assesses a financial institution's performance, risk management practices, and degree of supervisory concern.

Despite the banking system's "resilience" in the first three months of 2024, the FDIC warned that the finance industry "still faces significant downside risks" from high inflation, geopolitical uncertainty, and volatility in market interest rates.

"These issues could cause credit quality, earnings, and liquidity challenges for the industry," the report stated. "In addition, deterioration in certain loan portfolios, particularly office properties and credit card loans, continues to warrant monitoring."