U.S. banks are grappling with $482 billion in unrealized losses on their securities portfolios as of the fourth quarter of 2024, according to the Federal Deposit Insurance Corporation (FDIC). This marks a 32.5% increase from the previous quarter and represents 8.4% of the amortized cost of these securities.
📉 Understanding the Losses
Unrealized losses occur when the market value of securities held by banks falls below their purchase price, but the assets haven’t been sold. These losses are primarily due to rising long-term interest rates, which inversely affect bond prices. For instance, increases in 10-year Treasury yields and 30-year mortgage rates have significantly reduced the market value of banks’ fixed-income holdings.
🏦 Impact on Major Banks
Bank of America, for example, faces potential unrealized losses exceeding $100 billion on its bond portfolio, largely composed of U.S. agency mortgage securities. These losses, while not immediately impacting reported capital due to “held-to-maturity” accounting, reflect real economic declines.
Other major banks, such as JPMorgan Chase, Wells Fargo, Citigroup, and Goldman Sachs, also hold significant securities portfolios susceptible to interest rate fluctuations. The cumulative effect of these unrealized losses poses challenges to profitability and capital adequacy.
⚠️ Systemic Risks and Regulatory Concerns
The FDIC’s report highlights that 66 banks were on its “Problem Bank List” at the end of 2024, indicating financial, operational, or managerial weaknesses. While this is a slight decrease from 68 in the previous quarter, the elevated level of unrealized losses raises concerns about the stability of the banking sector.
Experts warn that if banks are forced to sell these depreciated securities to meet liquidity needs, the unrealized losses would become realized, directly impacting earnings and capital. This scenario contributed to the failures of Silicon Valley Bank and First Republic Bank in 2023, where sudden asset sales led to significant losses and eroded depositor confidence. The Times of India
🔍 Looking Ahead
The trajectory of interest rates will be a critical factor in determining the future impact of these unrealized losses. If rates continue to rise, the market value of existing securities could decline further, exacerbating losses. Conversely, a decline in rates could alleviate some pressure by increasing bond prices.
Regulators and banks must navigate this complex environment carefully, balancing the need for liquidity with the potential risks of realizing significant losses. Enhanced risk management practices and transparent communication with stakeholders will be essential in maintaining confidence in the banking system.