- Credit rating agency Moody’s Analytics estimates that US banks have $650 billion in balance sheet losses
- Bank of America reported last month that it had about $130 billion in unrealized losses
- Still, bank stocks are slowly rising as the craze has halted rate hikes
A collapse in the US bond market has left some of America’s largest and most prestigious banks with $650 billion in unrealized losses, analysts have predicted.
As interest rates have risen thanks to aggressive rate hikes by the Federal Reserve, the value of Treasury-issued bonds – which are held in large quantities by many banks – has fallen.
Typically, government bonds have been considered a safe place to invest customer deposits, but the high interest rates available elsewhere and the availability of new bonds with higher yields have made older bonds less attractive and therefore less valuable.
The declining value of these bonds played a major role in the collapse of Silicon Valley Bank in March and has raised ongoing concerns about the overall state of the U.S. banking industry.
An estimate from Moody’s Analytics last month indicated that U.S. banks could face hundreds of billions in unrealized losses as the value of their investments in several long-term bonds — made in the early days of the pandemic — have plummeted.
US banks are facing hundreds of billions in unrealized losses as the value of their investments in several long-term bonds have plummeted due to high interest rates
The declining value of these bonds played a major role in the collapse of Silicon Valley Bank in March, which had to sell them to absorb withdrawals
But while these depreciating bonds can negatively impact a bank’s balance sheet, unrealized losses are only a problem if they are actually sold at a loss.
Although they are generally purchased and intended to be held until maturity, if banks experience a wave of withdrawals – a run on the bank – they may have to sell them. That’s what happened to Silicon Valley Bank earlier this year.
The bank was forced to sell these bonds because its depositors tried to withdraw money.
Bank of America reported this last month Unrealized losses from holdings of government and mortgage bonds rose to nearly $132 billion in the third quarter. That was up from $106 billion in the previous quarter.
Bank of America’s share price hit a three-year low earlier in October on concerns about its large stock of depreciating bonds.
“These are all unrealized losses on government-guaranteed securities,” Bank of America Chief Financial Officer Alastair Borthwick said on an earnings call.
JPMorgan Chase had unrealized losses of $40 billion in its ‘hold to maturity’ portfolio in the third quarter
“Because we hold them until maturity, we expect not to incur any losses over time,” he added.
JPMorgan Chase had unrealized losses of $40 billion in its portfolio “held to maturity” in the third quarter, Reuters reported.
And while Citibank did not disclose its unrealized losses at the end of the third quarter, they amounted to approximately $24 billion at the end of the second quarter.
Nevertheless, regional bank stocks rallied around 10 percent last week after the Fed halted rate hikes again and signaled they may be over.
As interest rates return to manageable levels, the value of government bonds is expected to rise and the bank’s unrealized losses will decline.