Bank of America Reports Unrealized Losses on Securities
Bank of America’s Unrealized Losses on Securities
Bank of America, the second-largest U.S. lender, has reported unrealized losses of $131.6 billion on securities in the third quarter. However, the bank remains confident that these losses will not translate into actual long-term losses.
Investor Scrutiny on Unrealized Losses
Since March, investor attention has shifted towards unrealized losses, following the collapse of Silicon Valley Bank and the subsequent industry turmoil. However, analysts believe that Bank of America is unlikely to sell the securities at a loss due to its strong liquidity and higher capital. By holding these securities until maturity, the bank can avoid mark-to-market losses.
Held-to-Maturity Designation
Banks like Bank of America use the held-to-maturity designation when purchasing less risky securities, which provides downside protection. This strategy, although limiting upside potential in a rising interest rate environment, allows the bank to minimize losses.
Government-Guaranteed Securities
All of Bank of America’s unrealized losses are on government-guaranteed securities. The bank’s Chief Financial Officer, Alastair Borthwick, emphasized that because they are holding these securities until maturity, they do not anticipate any losses over time.
Changes in Securities Holdings
Bank of America’s held-to-maturity securities decreased from $614 billion in the second quarter to $603 billion in the third quarter. While these assets provide downside protection, they also limit the bank’s ability to generate higher profits from other investments with greater returns.
Unrealized Losses across U.S. Banks
Moody’s estimates that U.S. banks may be grappling with at least $650 billion of unrealized losses in their securities portfolios, a 15% increase from the previous quarter. JPMorgan Chase reported unrealized losses of $40 billion in the third quarter, while Citigroup did not disclose their paper losses. These unrealized losses, however, do not pose a significant accounting issue unless the banks decide to sell the securities.
Bank Strategies and Customer Deposits
Banks have the option to invest customer deposits by purchasing bonds for sale based on market prices or locking in rates for held-to-maturity securities. The latter strategy, although limiting potential higher yields, ensures stability as the bonds approach maturity.
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