America’s major banks are sitting on $650 BILLION of unrealized losses thanks to crashing bond market which also took down beleaguered Silicon Valley Bank
- Ratings agency Moody’s Analytics estimated US banks have $650B in balance sheet losses
- Bank of America reported last month it had around $130B in unrealizes losses
- Nonetheless, as the Fad paused its rate hikes bank stocks are slowly on the rise
A US bond market collapse has lumbered some of America’s largest and most prestigious banks with $650 billion in unrealized losses, analysts have predicted.
As interest rates have climbed thanks to aggressive hikes by the Federal Reserve, the value of Treasury-issued bonds – owned in large quantities by many banks – has fallen.
Typically, Treasury bonds have been considered a safe place to invest customer deposits, but high interest rates available elsewhere and the availability of new bonds with higher yields has made older bonds less appealing to investors and therefore less valuable.
The diminishing value of those bonds played a major role in the collapse of Silicon Valley Bank in March and has led to sustained concern about the overall condition of the US banking industry.
An estimate from Moody’s Analytics last month indicated that US banks could be dealing with hundreds of billions in unrealized losses as the value of their investments in various long-term bonds – made in the early days of the pandemic – has plummeted.
US banks are dealing with hundreds of billions in unrealized losses as the value of their investments in various long-term bonds has plummeted amid high interest rates
The diminishing value of those bonds played a major role in the collapse of Silicon Valley Bank in March, which had to sell them to accommodate withdrawals
But while those depreciating bonds can negatively impact a bank’s balance sheet, unrealized losses are only a problem if they are actually sold for a loss.
While they are generally purchased and intended to be held until they mature, if banks experience a surge of withdrawals – a run on the bank – they may need to sell them. That is what happened to Silicon Valley Bank earlier this year.
The bank was forced to sell those bonds as its depositors sought to withdraw funds.
Bank of America reported last month that unrealized losses due to its ownership of Treasury and mortgage securities had risen to almost $132 billion in the third quarter. That was a rise from $106 billion in the prior quarter.
Bank of America’s share price reached a three-year low earlier in October amid those concerns around the large holding of depreciating bonds.
‘All of these are unrealized losses are on government- guaranteed securities,’ Bank of America’s chief financial officer, Alastair Borthwick, said during an earnings call.
JPMorgan Chase had unrealized losses of $40 billion in its ‘hold to maturity’ portfolio in the third quarter
‘Because we’re holding them to maturity, we will anticipate that we’ll have zero losses over time,’ he added.
JPMorgan Chase had unrealized losses of $40 billion in its ‘hold to maturity’ portfolio in the third quarter, Reuters reported.
And while Citibank did not disclose its unrealized losses at the end of the third quarter, they were around $24 billion at the end of the second quarter.
Nonetheless, last week regional bank stocks experienced a rally of around 10 percent after the Fed once again paused its rate hikes and indicated they may be over.
As interest rates come back down to manageable levels, the value of Treasury bonds are expected to rise and the bank’s unrealized losses will shrink.
