Many US banks face a dilemma of how to accommodate their assets portfolio in an uncertain interest-rate outlook. Given collapsing securities prices coupled with supersized securities portfolios, banks are now sitting on record mark-to-market losses.
According to data from the Federal Deposit Insurance Corp, unrealized losses hit bank capital to the tune of $253 billion at the end of June 2022. US banks currently have $5.66 trillion of securities on their balance sheets, alongside $3.19 trillion of uninvested cash, according to Federal Reserve data. Their holdings include US Treasury and foreign government bonds, agency bonds, mortgage-backed securities, corporate bonds, and more.
One of the challenges is how to allocate securities between two distinct portfolios with different accounting treatments. Banks can hold securities in a “held-to-maturity” (HTM) bucket that prohibits them from selling, or an “available-for-sale” (AFS) bucket that allows them to trade around positions. The advantage of “available for sale” is that it affords more flexibility in a shifting rate environment; the disadvantage is that losses have to be marked to market and deducted from the bank’s capital base.
In an effort to stabilize capital, many banks have shifted assets away from AFS toward HTM. According to Washington Post, at the end of June, 44% of the banking system’s securities were in HTM, versus 20%-25% before 2021.
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