Bank Income Surges & Market Risk Rises

August 31, 2026 | Whalen Global Advisors LLC (WGA) has published the latest edition of The IRA Bank Book for Q3 2026, the quarterly review and outlook for the US banking industry. The report highlights a number of mounting risks facing US banks, including soaring market risk from stock margin and securities lending, loans to nonbank funds and sponsors, and significantly overvalued mortgage servicing rights (MSR) in the housing finance sector.

The IRA Bank Book Q3 2026

The new WGA report includes a discussion of the composition of industry revenue and earnings, and the outlook for the second half of 2026. The report includes over 30-pages of charts and commentary.

Quarterly net income totaled $90.1 billion in second quarter 2026, up $9.7 billion (12.0 percent) from the prior quarter. The sharply higher quarterly increase in net income was driven by surging noninterest income (up $5.5 billion, or 6.1 percent) that was mostly due to trading revenue and fee income due to the boom in AI stocks and related borrowing.

Source: FDIC

Loans to non-bank financial firms such a private credit sponsors have accounted for a large portion of bank loan growth over the past year, the report notes. But in the most recent quarter, margin lending and borrowing related to securities transactions shown in the all other loans category are actually growing faster than are loans to non-depository financial institutions (NDFIs), as shown in the chart below.

Source: FDIC

Bank MSRs "Significantly Overvalued"

The new WGA report also notes that bank-owned mortgage servicing rights or MSRs have been significantly overvalued since the end of 2023. The massively overvalued MSR was not just a problem for United Wholesale Mortgage (UWMC), as the report details. They were just the most obnoxious about it.

Source: MBA, FDIC

The WGA report notes that the public accounting firms have encouraged banks to lend against MSRs that are dramatically overvalued. Some IMB MSR portfolios are hedged, but most aren’t. UWMC, according to many accounts, first tried to sell MSRs to raise capital and could not clear the trade anywhere close to their portfolio mark, so instead they took the rescue financing from Oaktree Capital (See "Did a Hedge Kill United Wholesale Mortgage? Really?").

Investors, regulators and policy makers still do not appreciate how close UWMC came to an event of default at the end of Q2 2026. In Q3 2026, commercial banks reportedly are taking market share from independent mortgage banks (IMBs) in 1-4 family loans at low or no margins, creating a possible risk event for both banks and their customers as credit conditions tighten. One leading industry CEO tells The IRA:

"The public accounting firms are running an MSR Ponzi scheme. Meanwhile, if banks take market share as they did in Q2, these IMB MSRs are going to be torn up. The speed assumptions are already single digits in many cases and recapture sky high- the assets can’t go any higher. That means they've already pulled forward collectively billions of noncash gains. Some are hedged but most aren’t."

Mounting Market Risk to Banks

The shift of bank earnings in 1H 2026 to a greater dependence upon fees and market-based lending on stock margin and securities purchases is a concern for the future. Under-reporting and forbearance with respect to private credit and equity exposures is another hidden risk to banks that, again, the public audit firms are complicit in facilitating. The WGA report states:

"Bank of America (BAC) CIO Michael Hartnett notes that it is imperative for the Bessent/Warsh combo to stop higher US  Treasury yields, since long duration trades are working ”too well.” We view such talk as wishful thinking from the Sell Side of the market. There is no way for the Treasury to force LT yields down, thus the only alternative is for the Fed to 1) raise ST interest rates and 2) restart quantitative easing (QE), an eventuality that would signal surrender on the fight against inflation.

Copies of the IRA Bank Book Q3 2026 report are available to subscribers to the Premium Service of The Institutional Risk Analyst. Stand alone copies of the report are also available for purchase in the WGA store. Media wishing to receive a courtesy copy of the report please email us: info@rcwhalen.com. Premium Service subscribers may login and download a copy of the new report at the bottom of this post.

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