Banking News

How unrealized bond losses are hampering the banking industry

[ad_1]

Increasing losses on banks’ bond portfolios are becoming more than a mere annoyance, particularly for some smaller institutions.

After this year’s sharp rise in interest rates prompted massive losses across the bond market, banks are underwater on bonds they purchased when rates were low. Bond prices go down when rates increase and higher-paying bonds become available.

The losses are likely to be temporary and only on paper. Still, banks are facing a higher risk that they’ll have to sell the bonds before they reach their maturity date and return to their original value — thereby “realizing” what are currently “unrealized losses.”

In the meantime, the losses are lowering the value of banks’ equity. That’s because every quarter, banks have to adjust the value of any bonds they mark as “available-for-sale.” Over the past three quarters, those values have fallen thanks to inflation and the Federal Reserve’s rate increases.

The bond losses are affecting banks big and small, though “for the smaller banks it is a bigger issue,” said Michael Rose, a bank analyst at Raymond James. Their decreased equity levels could trigger restrictions on their borrowing from the Federal Home Loan banks and lessen their value as they look to buy other banks or sell themselves.

Unrealized bond losses are also a growing source of investor hand-wringing, even as bank executives argue that they should not be a big concern.

What follows is a look at four ways the issue is impacting banks.

[ad_2]

Source link