US banks face increasing unrealized losses due to high interest rates and shaky economic conditions.
US banks are facing unrealized losses on bond securities that have reached a total of $750 billion in the third quarter of 2024. The amount is seven times higher than the losses recorded during the 2008 financial crisis, which were about $100 billion. These losses are closely associated with Available for Sale (AFS) and Held to Maturity (HTM) securities portfolios, with assets such as residential mortgage-backed securities, corporate bonds, and government securities particularly affected by rising interest rates.
Factors behind the losses
The main losses stem from residential mortgage-backed securities (RMBS), which have experienced a reduction in value due to rising mortgage rates. Corporate bonds and Treasury securities have seen a strong devaluation, fueling bank losses. Financial institutions such as Bank of America have noted substantial impacts, with the bank reporting bond losses of $85.7 billion and a reduction in its held-to-maturity securities portfolio totaling $116 billion over the past three years. Currently, 1,027 banks with assets over $1 billion are active in the market, of which 47 have reported losses above 50% of their equity capital as of June 30, 2024.
Risk monitoring and management
Regulatory authorities, particularly the Federal Deposit Insurance Corporation (FDIC), have intensified scrutiny, requiring banks to implement better practices for liquidity stress tests and more effective management of risks related to uninsured deposits. According to analysts, if interest rates were to stabilize or decrease, banks would have the opportunity to recover up to 25% of the losses.
