America's banks are sitting on $620bn of hidden losses

The Federal Deposit Insurance Corporation (FDIC) recently published a statistic that should have set off alarm bells across every bank risk committee in America: commercial banks are currently sitting on approximately $620 billion in unrealised losses on their securities portfolios. This colossal balance-sheet hole—representing nearly forty per cent of the total tangible common equity of the entire US commercial banking sector—is an immaculate artifact of regulatory accounting. By classifying hundreds of billions of long-dated Treasuries and mortgage-backed securities as "Held to Maturity" (HTM), banks have been permitted to legally pretend that the fastest bond sell-off in forty years simply never happened.

The mechanics of the HTM accounting loophole are straightforward: so long as a bank claims it has the intent and ability to hold a bond until it matures, it is exempt from reflecting mark-to-market losses on its income statement or regulatory capital ratios.

The Mark-to-Market Fiction

During the zero-interest-rate environment of 2020 and 2021, commercial banks were flooded with trillions in pandemic deposits. Lacking commercial loan demand, they invested this cash into 10-year Treasuries and 30-year agency MBS yielding an anaemic 1.5 to 2.0 per cent.

When benchmark sovereign yields surged toward 4 per cent, the fair market value of those fixed-rate assets collapsed by twenty to thirty per cent. On paper, the banking system appears robustly capitalised; in liquidation reality, an enormous chunk of common equity has been completely incinerated by duration risk.

The Liquidity Trap

The accounting fiction works flawlessly under one critical condition: depositors must leave their money parked in the bank forever. But in an era where risk-free Treasury bills yield 4.75 per cent, depositors are no longer passive.

If deposit outflows force a bank to liquidate its HTM securities to generate cash, the unrealised loss must be instantly recognized, wiping out regulatory capital and triggering immediate insolvency. America’s banking sector has built an elaborate fortress of regulatory accounting around its bond portfolio, but that paper solvency remains entirely dependent on the goodwill of depositors who are discovering that they can earn four times as much elsewhere.