From the WSJ:
A surge in interest rates likely worsened unrealized losses on bonds and loans held by U.S. banks in the third quarter, further straining their balance sheets as they face pressure to pay more to keep depositors.
Unrealized losses were a key cause of Silicon Valley Bank’s failure in March, which spurred other bank runs. That risk has ebbed. Total deposits at U.S. commercial banks were little-changed since the end of the second quarter, according to the Federal Reserve’s latest data, although they are down 5% since their peak level in April 2022.
The higher rates are due to a robust economy, calm in the banking system and, more recently, signals by the Fed that it will likely keep rates higher for longer.
That has led to earnings pressure for many banks, now paying higher rates on deposits and other funding sources while the returns on their older, fixed-rate assets stay low. Banks are lending more at the current high rates, potentially easing that strain.
Importantly, however, the industry has staunched deposit outflows for now. “I expect unrealized losses to increase,” said Alexander Yokum, a banking analyst at the investment-research firm CFRA. “For us, solvency issues are less of a concern, but the amount of profitability is a concern.”
Yields rose dramatically in the third quarter, especially for long-dated bonds. Yields on 10-year Treasurys rose three-quarters of a percentage point to 4.57%.
Higher yields cause debt prices to fall, reducing the value of trillions of dollars in fixed-rate bonds and loans that banks hold, regardless of whether they intend to sell the assets. In some cases, the losses were equal to or greater than banks’ equity, or the buffer they hold to absorb such hits. That led to a crisis that brought down three regional banks earlier this year.
The ensuing volatility gave banks some relief: Investors seeking safety bought Treasury debt, lowering benchmark yields and helping raise prices across debt markets, including those for banks’ fixed-rate assets.
Since then, rates have rebounded as the panic subsided. Growth in emergency borrowing has slowed under the Fed’s Bank Term Funding Program, created after Silicon Valley Bank collapsed in March to help banks with short-term liquidity needs. The program had $103 billion of loans outstanding at midyear, but is up only slightly since then to about $108 billion. Such loans, now at a fixed rate of 5.54%, must be repaid within a year and are considered a relatively expensive source of liquidity.
U.S. banks’ unrealized losses on investment securities were $558 billion as of June 30, according to the Federal Deposit Insurance Corp. The unrealized losses were up from $516 billion three months earlier, but down from their peak of $690 billion at the end of last year’s third quarter. More than half of such losses each quarter were on bonds classified as “held-to-maturity,” and so not included on banks’ balance sheets under the accounting rules. At the end of 2021, unrealized losses were negligible systemwide.