NEW YORK–Unrealized losses on bonds and loans held by U.S. banks are expected to have grown in the second quarter, even as pressure on profits is rising, according to a new analysis.
In addition, noted the Wall Street Journal, a resilient economy and a steadier banking system caused market values for debt to generally fall in the quarter, reflecting expectations the Federal Reserve would keep interest rates higher for longer. And all of that is occurring as the rates financial institutions pay on deposits and other funding sources have risen while returns on their fixed-rate assets stay low, the Journal added.
Unrealized losses “should be pretty close to back to where we were at the end of 2022 for the vast majority of banks,” Richard Sbaschnig, an analyst at the investment-research firm CFRA, told the Wall Street Journal. “It still feels like there’s some liquidity pressure on the banks, although obviously the risk of an immediate failure seems to have dropped precipitously.”
Relative Calm
As the Journal analysis noted, lower debt prices reduce the value of trillions of dollars in assets that banks hold, regardless of whether they intend to sell the bonds or loans. Investors at the start of this year grew uneasy with the magnitude of these unrealized losses, which topped $600 billion following the Fed’s campaign to sharply raise interest rates in 2022, the report noted.
But after three major banks failed, the relative calm of the just-ended second quarter, though, has lowered the market values of many bank assets as yields on Treasury debt rose, the Journal said.
What’s Coming
“Based on the higher yield requirements by investors, you’ll see lower prices and lower fair values on securities and on loans, too,” Frank Wilary, principal at Wilary Winn, an advisory firm that helps banks and credit unions determine fair-value measurements for their financial reports, told the Journal.
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