Unrealized Bond Losses in US Banks Leading to SVB Bankruptcy... Reduced After Crisis

As the aftermath of the Silicon Valley Bank (SVB) crisis in the United States continues, the issue of unrealized losses on bonds in the banking sector, initially cited as the background of this crisis, appears to be diminishing.

The Wall Street Journal (WSJ) reported on the 18th (local time) that although the sharp interest rate hikes caused losses in banks' bond portfolios and led to SVB's bankruptcy, these losses have been reduced recently as government bond yields have fallen amid concerns over the banking sector crisis.

Bank of America (BoA), which announced its first-quarter earnings on the day, still recorded valuation losses on its held-to-maturity bonds, but unrealized losses decreased by $9.5 billion compared to three months ago. Compared to six months ago, when government bond yields peaked, the scale of these losses has shrunk by $17.1 billion.

BoA was one of the banks that actively purchased government-guaranteed bonds during the pandemic's low-interest-rate environment. With abundant cash and lukewarm loan demand, bonds were chosen as a kind of store of value for investing funds. However, when the Federal Reserve (Fed) began aggressive rate hikes starting in March last year, government bond yields surged and bond prices plummeted. BoA stated that it would hold most of its securities until maturity, but it could not prevent a sharp increase in unrealized losses. As of the end of September last year, unrealized losses exceeded $116 billion. WSJ pointed out, "If these losses were recognized, it could mean the disappearance of 43% of total capital," describing it as "the difference between assets and liabilities."

[Image source=EPA Yonhap News]

Since the SVB crisis, which rattled global financial markets last month, government bond yields have sharply declined. The 10-year yield, which had surpassed 4% before the SVB crisis, is currently hovering around 3.5%. WSJ diagnosed that the decline in the benchmark 10-year yield is a consequence of increased fears of a recession due to turmoil in the banking sector.

This has also played a role in reducing the feared unrealized losses on bonds in the banking sector. BoA announced that as of the end of the first quarter, unrealized losses on held-to-maturity bonds decreased to $99.08 billion, accounting for 35% of total capital. JP Morgan Chase also saw a reduction from about $40 billion at the end of September to $31 billion at the end of March. WSJ evaluated, "As interest rates fall and some bonds reach maturity, losses are decreasing."

The portfolio of the bankrupt SVB was confirmed to be more concentrated compared to portfolios held by other banks. As of the end of September last year, SVB’s unrealized bond losses amounted to $15.9 billion, exceeding shareholder equity of $15.8 billion. This forced SVB into a situation where it had to sell bonds at a loss to cover customer withdrawals. SVB’s deposit base was also evaluated as relatively unstable.

This content was produced with the assistance of AI translation services.