US Banks Report $251 billion of “Unrealized Losses” on Securities Investments in 2018, the Most Since 2008: FDIC

And other juicy banking nuggets.

By Wolf Richter of WOLF STREET.

Net income in Q4 2018 among all 5,406 FDIC-insured banks and thrifts more than doubled year-over-year to $59 billion, due to “higher net operating revenue” and “lower income tax expenses”; and full-year net income rose 44% to $237 billion, the FDIC reported today in its Quarterly Banking Profile. But over the same period, “unrealized losses” on investment securities – losses that are not included in the “net income” figures above – ballooned to $251 billion, the largest unrealized losses since 2008.

“Unrealized losses” are losses on securities that dropped in value but that the banks have not yet sold. In other words, they’re “paper losses.” Every quarter in 2018 brought steep unrealized losses: Q1: $55 billion; Q2: $66 billion; Q3: $84 billion; and Q4: $46 billion (chart via FDIC, red marks added):

Banks designate these securities either as “held-to-maturity” securities, valued at “amortized cost” or book value (light blue in the chart above) and “available-for-sale” securities valued at “fair value,” such as market value (dark blue).

These securities holdings are concentrated in bonds. When yields rise, as they did during much of 2018, bond prices fall. This is where a large part of these losses come from.

When banks hold bonds to maturity, the bonds are redeemed at face value, and banks are paid face value for those bonds. If banks didn’t pay a premium when they bought those bonds, they will not lose money on them, and the “unrealized losses” go away. Also, if bond prices rise, as they have been in the current quarter, some of the unrealized losses will be reversed.

But if banks are forced to sell those bonds during a liquidity crunch, as happened during the Financial Crisis, the “unrealized losses” become real losses

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