Fitch Ratings: Interest rate changes to contribute to lower unrealized gain positions for banks

fitch-ratingsFitch Ratings said recently that, as a result of the change in interest rates, banks will report lower unrealized gain positions at the start of earnings season on Friday.

As of the end of June, net unrealized gains fell to just $6 billion—down from $35 billion in March. The 10-year bond jumped by approximately 65 basis points, and short-dated U.S. Treasuries remained unchanged.

The value of securities holdings rose to near peak levels, setting the stage for a reversal as bond prices fall in a rising rate scenario. While the industry will likely see a significant decline, the actual financial impact will not be immediately apparent in the near term.

Excess bank liquidity and robust liquidity profiles are unlikely to encourage banks to use their available-for-sale portfolios  as a source of short-term liquidity. As rates increase, aggregate gains on bank securities will revert to losses. Banks will not be forced to sell at a loss for funding needs, thereby allowing them to avoid realized losses.

For banks subject to Basel II standards, unrealized gains will not contribute much to regulatory capital ratios, and if rates continue to rise, the banks could see a drag on capital ratios. The reversion to a loss position, for the rest of the industry, could result in a one-time capital hit.

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