The headline that “US banks unrealized losses Q2 2025” amount to about $395 billion underscores a major challenge in the banking sector’s balance sheets. These losses stem from banks holding investment securities whose mark-to-market values have declined. This article breaks down how we got here, what it means, and what to watch going forward.
What the number represents
- According to recent data, banks in the United States are carrying around $395 billion in unrealized losses on their investment securities portfolios as of Q2 2025. Bloomberg
- The losses largely come from fixed-income securities (e.g., bonds, mortgage-backed securities) that were acquired when interest rates were lower, and have since declined in value as yields rose.
- These are unrealized losses — meaning the banks haven’t sold these assets yet. If held to maturity, many banks may still receive full principal, unless the issuer defaults.
Why are the losses so large?
- Interest rates & bond prices: When interest rates rise, the market value of existing lower-yield bonds falls. Many banks bought large volumes of long-duration securities during periods of low yields.
- Balance-sheet composition: Banks often hold large portfolios of “available-for-sale” (AFS) or “held-to-maturity” (HTM) securities — these portfolios can generate unrealized losses even if credit risk is low.
- Duration risk: Long-term instruments are more sensitive to interest-rate changes — the longer the maturity, the more the value can drop when rates go up.
- Regulatory & accounting factors: Though unrealized, such losses may affect regulatory capital, planning, and investor sentiment, especially if there’s pressure to sell these assets.
What this means for banks & the economy
- Liquidity & risk: If a bank is forced to sell these investments to raise cash or meet deposit outflows, the unrealized losses become realized — which can hit capital.
- Earnings & margins: While many losses are on the paper value, they may still impact net interest margins, risk-weighted assets or provisioning if banks reassess portfolios.
- Investor confidence: Large unseen losses may dampen investor sentiment, especially if banks don’t clearly communicate how they will manage or unwind them.
- Macro implications: In a stress scenario — e.g., deposit withdrawals, interest-rate shocks, asset sales — these losses could amplify financial-stability concerns.
Risks & caveats
- Because these are unrealized, they do not necessarily imply immediate solvency risk — many banks will hold assets to maturity and avoid losses if credit quality remains intact.
- Some banks may have hedged their portfolios or managed duration risk, reducing actual impact.
- The number (~$395 billion) is an aggregate and may mask variations: some banks will have larger exposure, others much less.
- The banking sector’s capital buffers, regulatory oversight, and stress-testing mechanisms may mitigate the threat — though they may not eliminate the risk entirely.
What to watch going forward
- Monitor quarterly bank reports for disclosures on unrealized losses, mark-to-market adjustments, and asset-sale plans.
- Track interest-rate movements, which will impact the value of long-duration securities held by banks.
- Watch for deposit flows, especially in smaller or regional banks; pressure here could force asset sales.
- Observe regulatory updates from Federal Deposit Insurance Corporation (FDIC), Federal Reserve and other bank supervisors on how they view this exposure.
- See whether banks begin to realise losses, restructure portfolios or shift to shorter-duration assets.
Conclusion
The fact that U.S. banks are carrying about $395 billion in unrealized losses as of Q2 2025 is a significant backdrop for the financial sector. While many losses may remain on paper for now, they represent a latent risk — especially if banks are forced to sell, or if interest-rate and liquidity conditions worsen. For investors and analysts, the key will be transparency on how banks are managing the exposure and the likelihood of realization under stress.
