One of the world’s largest financial institutions, Bank of America, has recently reported its unrealized losses that total a staggering $131.6 billion on securities. The record has sent shockwaves in the financial industry as investors grow cautious and worried.
The amount is increasing according to recent data sources. However, the Bank of America is still topping in profits based on its high interest rates. It has recorded an increase in profit margin since last year.
Bank of America struggles with inflation and loss
After recording a 10% increase in its profits, the Bank of America accounted for a $131.6 billion unrealized loss in securities. This was after recording $106 billion in paper losses in the second quarter. However, the Bank of America stated that the long-term results wouldn’t be such negative records and said the losses would be mitigated.
Unrealized losses occur when the investment value of an asset drops below its initial purchase price. Regardless, it’s recorded when investors haven’t sold their assets. As such, the losses are considered “unrealized” since the investments have not been sold. At that point, the losses become realized.
So these unrealized losses are from treasury holdings that would only become realized if BOA has to sell all of their bonds immediately. As the treasuries move closer to maturity the losses will transition to gains. The Fed has already backstopped the banks. That is the entire…
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These unrealized losses are common in the financial market when the value of securities experiences fluctuations caused by particular reasons. Among the factors leading to this is the global market’s volatility as well as the changing interest rate values.
The giant financial firm had recently disclosed that it had $603 billion in securities that were awaiting maturity. This was also a drop of $11 billion from $614 billion in 2022. The securities were held till maturity in order for the bank to mitigate market-to-market losses and have flexibility.
Additionally, the “hold-to-maturity” strategy was employed to aid the bank in acquiring safer securities. Primarily, this is done to avoid investing in securities that might showcase potential losses in the future.
There is a downside to this; as interest rates increase, the chances of yielding substantial gains are limited. Still, the unrealized security losses have grown by 24.4% over the last quarter.
Sentiments around the recent report
Factoring in the financial bank’s large liquidity pool, the long-term strategy intended would not risk the securities sale with the unrealized loss. It’s highly unlikely that the financial bank could sell the securities at a loss. It’s because the BoA has solid lender funding based on customer capital and deposits.
Furthermore, its specific investments couldn’t cover the security’s losses if they were to be sold. In total assets, the Bank of America accounts for a whopping $2.5 trillion.
Among the issues contributing to the huge unrealized losses is the collapse of multiple US banks that fell at the beginning of the year since March and has put BoA under scrutiny.
Silicon Valley Bank is among these institutions where the firm sold some of its assets at a loss. The ripple effect of this was a devastating downfall that has crippled the financial industry upstream since the financial crisis in 2008.
However, considering the report release of the third quarter’s earnings this week, the financial institution is likely to generate profits in the long term, dismissing the current data findings as alarming.
According to Gold investor Peter Schiff, his comments on the recent unrealized losses growth by the Bank of America were harsh realities.
For the 1st half of the year Bank of America reported pre-tax income of $48.1 billion, yet ignored an additional $95.9 billion loss on its “held-to-maturity” securities. So, the bank actually lost $47.8 billion. It’s in worse shape now than it was when it was bailed out in 2008.
Peter Schiff
Taking into consideration that the year is barely over, the unrealized losses in the final quarter could be much higher. An estimate of about $650 billion would be the amount expected, considering the downtrend of the securities value. However, even with the $7.8 billion increase in unrealized losses since the second quarter, it is likely that the BoA will correct these losses in the future.