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AS RATES STAY HIGH, BANKS STILL SITTING ON LARGE UNREALIZED LOSSES

Banks are continuing to sit on large unrealized losses in their securities portfolios as the Federal Reserve keeps rates relatively elevated, analysts at the Office of Financial Research said in a blog on Thursday.

Rapidly rising interest rates during 2022 - 2023 increased bank’s unrealized losses. These “came under intense scrutiny when Silicon Valley Bank failed and triggered turmoil in the banking industry," analysts Jose Maria Tapia and Hashim Hamandi said in the blog.

"Regional banks with large unrealized securities losses due to lack of appropriate interest rate hedging and a significant portion of uninsured deposits were vulnerable to runs,” they added.

Now, despite the Fed having cut rates by 100 basis points since September, Treasury yields have remained relatively high, and 30-year mortgage rates and 10-year Treasury yields have increased.

“The higher Treasury yields have kept unrealized securities losses at elevated levels, albeit lower than their peak levels.” As of Dec. 2024 aggregate unrealized securities losses at FDIC-insured banks were at $481 billion, the OFR said.

Residential mortgage-based securities are the primary contributor to losses, while Treasuries have lower levels of losses relative to the size of their investments. Commercial mortgage-backed securities and municipal debt also showed higher losses but made up a smaller share of investment portfolios.

"While unrealized securities losses alone may not have a direct impact on banks, they could amplify vulnerabilities when banks face stress and increase the chance of lack-of-confidence runs for some banks," the analysts said.

(Karen Brettell)

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