The Wall Street Journal published an article today "about the new weakness in the balance sheets of
large banks : they hold so many bonds that they can't avoid trouble when interest rates rise"
When Fed Chairman announced that they would begin to taper their bond buys long term
rates jumped by a full percentage point in May and June,and bank investments in mortgage-backed securities and Treasuries plummeted. Morgan Chase,Bank of America,Citgroup and Wells Fargo saw the holding of these assets fall by more than US$ 13 billion in Q2.
"Banks in recent years invested in bonds in search of returns as a way of making up for weak loan demand and billions in annual income lost to a slew of new U.S. regulations. But now the size of these portfolios is exposing banks to vulnerabilities even though their holdings are largely considered safe". "Bond instruments now comprise nearly 99% of the $1.159 trillion investment portfolios held by the top four banks", according to Charlottesville, Va., data provider SNL Financial.
Q2 losses didn't affect banks' earnings because of accounting rules that allows institutions to keep any paper losses on long-term bonds out of the profit-and-loss statement. As a result, the four biggest banks were able to churn out more than $20 billion in net income during the quarter, a 33% increase YoY.
But analysts said "the unrealized accounting losses, which result from a quarterly evaluation by the banks of how much the securities are worth, could hurt banks in the long run. They can reduce the banks' reported book value, or net worth, and have the potential to eat away at the capital they hold to protect against future losses".
"Bank of America's unrealized losses on its long-term bond holdings more than doubled to $7.71 billion in the second quarter from $3.48 billion in the first quarter. Income tied to the value of investment portfolios held by J.P. Morgan Chase & Co. and Wells Fargo & Co. went down by slightly more than $3 billion apiece, while the value of Citigroup Inc.'s holdings decreased by $2.86 billion. In all cases the movements represented less than 2% of the value of the banks' total portfolios".
At Bank of America, mortgage bonds issued by Fannie Mae, Fredy Mac and
Ginnie Mae represent 84% of the bank's $241 billion securities portfolio.
