U.S. Bank Financial Challenges: Rising Interest Rates, Devaluation of Bonds, and Impact on Unrealized Losses

Recently, banks in the US face financial instability due to rising interest rates and government bond yields. The explanation:

1. Interest Rates and Securities:

- There is an inverse correlation between interest rates and bond prices. As rates have risen this year, fixed-rate bonds have depreciated in value. Banks, during the pandemic, invested more in securities with high deposits and low demand for loans.

2. Impact on Banks:

- Higher yields negatively affect bank balance sheets, decreasing the market value of securities and capital reserves. While high rates increase loan gains, they increase costs and reduce the value of securities as assets, affecting profits and liquidity.

3. Banking Crisis in 2023:

- In July 2022, the inversion of the yield curve indicated an economic cooling. With rates raised by the Federal Reserve in response to 2021-2023 inflation, bond prices have fallen. March 2023 saw the failure of three banks due to exposure to bonds and cryptocurrencies, causing a stock market crash and regulatory intervention.

4. Bankruptcies:

- Silicon Valley Bank suffered after selling Treasury bonds at a loss. Other banks have failed due to cryptocurrency volatility.

In the third quarter of 2023, Bank of America reported unrealized losses of $131.6 billion on held-to-maturity securities, an increase from nearly $106 billion in unrealized losses in the second quarter of the same year. The situation was attributed to fluctuations in the market value of bonds in response to changes in interest rates. Although these losses are classified as “unrealized” because the securities were not sold, they reflect the decrease in the value of the assets held by the bank.