The Blubber

U.S. banks could be grappling with at least $650 billion of unrealized losses in their securities portfolios, per Reuters.

In the third quarter, Bank of America (BAC.N) disclosed unrealized losses of $131.6 billion on its securities portfolio, showing an increase from the second quarter. Nevertheless, the bank holds the belief that these assets will not result in actual losses over the long term.

Investors have become more focused on unrealized losses since March when Silicon Valley Bank sold a portion of its holdings at a significant loss, triggering its collapse and contributing to the most severe industry turbulence since the 2008 financial crisis.

Industry analysts assert that it is highly improbable for Bank of America to divest these securities at a loss because the bank enjoys robust liquidity from consumer deposits and maintains a higher capital position. Furthermore, retaining these securities until maturity provides the flexibility to avoid mark-to-market losses.

Banks employ the "held-to-maturity" classification to invest in less risky securities that offer downside protection, even though in a rising interest rate environment, their potential for gains is limited.

"All of these unrealized losses pertain to government-guaranteed securities," commented Bank of America's Chief Financial Officer, Alastair Borthwick, during a conference call on third-quarter earnings. "Since we are holding them to maturity, we anticipate that we will eventually incur zero losses."

In the second quarter, Bank of America had recorded approximately $106 billion in paper losses.

As per a filing released on Tuesday, the second-largest U.S. lender reported that it held around $603 billion in held-to-maturity securities, a decrease from the $614 billion in the second quarter.

Nonetheless, the holdings of low-yielding assets have constrained the bank's capacity to generate higher profits from allocating its funds in money markets or other investments with superior returns, as suggested by industry analysts.

"The bank has one of the lower overall yields on its securities book, and that securities book is there to stay for a while," noted Eric Compton, an analyst at Morningstar.

A Moody's estimate indicates that U.S. banks could be grappling with unrealized losses totaling at least $650 billion in their securities portfolios. This assessment comes after a bond market upheaval during the third quarter, fueled by the anticipation of higher interest rates being maintained for an extended period.