“Unrealized Losses” on Securities Held by Banks Jump by 22% to $684 Billion in Q3, Oh Lordy

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They amount to 32% of Tier 1 capital and don’t matter, until they suddenly do.

“Unrealized losses” on securities – mostly Treasury securities and government-guaranteed MBS – at FDIC-insured commercial banks at the end of Q3 jumped by $126 billion (or by 22%) from the prior quarter to $684 billion, according to the FDIC’s quarterly bank data release on Wednesday.

These unrealized losses were spread over the two accounting methods:

  • Unrealized losses on held-to-maturity (HTM) securities jumped by $81 billion from the prior quarter, to $391 billion.
  • Unrealized losses on available-for-sale (AFS) securities jumped by $45 billion from the prior quarter to $293 billion.

These paper losses occur predictably when interest rates rise. As yields rose in Q3, the market prices of those bonds fell, and the unrealized losses stacked up. For example, the 10-year Treasury yield jumped from 3.81% at the beginning of Q3 to 4.59% at the end of Q3. In periods when yields fell and bond prices rose, banks had “unrealized gains” (green).

“Unrealized losses” on securities held by banks don’t matter because at maturity in 7 or 10 or 25 years, banks will be paid face value, and the losses are only temporary, so to speak. They don’t matter until they suddenly do.

Banks, via a quirk in bank regulations, don’t have to mark these securities to market value but can carry them at purchase price. The difference between market value and the purchase price is the “unrealized gain or loss” that the bank must disclose in its quarterly financial filings, so that we the depositors can see them and get spooked by them and yank our money out, us billionaires and centimillionaires first, on the two fundamental principles of investing: 1, he who panics first, panics best; and 2, after us the deluge.

And thanks to today’s electronic fund transfers, the bank that we yank our money out collapses at lightning speed, see Silicon Valley BankSignature Bank, and First Republic.

The accumulated unrealized losses of $684 billion were not a record, but we are still $6 billion lower than the record in Q3 2022, because the FDIC took over the three regional banks earlier this year, and sold their assets, including their securities, at something close to market value, and thereby ate those paper losses…..


Continue reading this article at Wolf Street.

Image Credit: Wikimedia Commons



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