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Mentioned in the article, Chart 7 from an FDIC report [1] is concerning, specifically that currently there are “unrealized losses on available–for–sale and held

Mentioned in the article, Chart 7 from an FDIC report [1] is concerning, specifically that currently there are “unrealized losses on available–for–sale and held–to–maturity securities totaled $620 billion” — which appears to be not only a recent trend, but roughly 10x more than any point in recent history, including during 2008. Is anyone able to provide more context and clarify how significant these losses are to the US banking system beyond what’s covered in the article? [1] https://www.fdic.gov/news/speeches/2023/spfeb2823.html?ref=bits-about-money https://www.fdic.gov/news/speeches/2023/spfeb2823.html?ref=b... _________________ EDIT: For the unfamiliar, OP article’s author is a notable user on HN: https://news.ycombinator.com/user?id=patio11 https://news.ycombinator.com/user?id=patio11

airstrike 4y ago
these are unrealized losses so not necessarily significant if just held to maturity or sold when prices are less punishing they can be an issue if, say, all your depositors decide to make huge withdrawals and the bank's immediate cash needs balloon, or if they have specific payments they need to make in the near term which would force those "available for sale" securities to be actually sold none of this is an inevitable risk. there are ways to hedge against rising rates. the current rate hikes, although historic in their pace, have also long been anticipated by the market and telegraphed by the Fed. that bank administrators failed to plan accordingly is honestly baffling
- O__________O 4y ago
  Possible I am missing something, but your response appears to assume the securities will recover their loses prior to being sold and/or that these unrealized losses do become actual losses, should banks need to sell securities to meet liquidity needs. Without additional context, seems like wishful thinking to believe such losses will ever be recovered. In fact, while I might be wrong, those unrealized losses assume current market conditions; meaning they do not represent the actual total assets at potentially at risk; might be wrong about this. Am I missing something?
  - hn_throwaway_99 4y ago
    > Am I missing something? Yes. As bonds get closer to their maturity date, the discount one would have to sell them at to garner a higher prevailing interest rate goes away. That is, the nominal loss "naturally" goes away over time. The article kind of explains this.
  - delfinom 4y ago
    They are unrealized losses if the assets are sold at market. They are not losses if the assets are held to maturity.
  - kortilla 4y ago
    They are bonds. Unless they default they will eventually reach maturity and pay out the original gain. The problem is that might be a 20% gain 10 years from now, so nobody will be willing to buy that bond off of you for the price you paid since they can 40% on new 10 year bonds. The only time a bond price decline is concerning is if you have to sell it rather than holding to maturity.
  - mikeyouse 4y ago
    The point with bonds is that they'll "recover their losses" if you hold them to maturity. Think about three time frames: Year 0: I buy a new-issue $100 bond paying 1.5% interest for $100. I will receive $1.50 every year for 5 years and then get $100 back. Year 3: Interest rates have increased pretty dramatically, so 2-year bonds are now paying 3% interest. So for someone 'shopping' for a bond that matures in 2 more years, they can buy a new-issue one paying 3% or they could buy my 5-year with 2-years remaining that is only paying 1.5%. Obviously they would buy the new-issue unless I offer a substantial price discount. So if I "mark to market" my bond, I would have to sell it for something like $85 to be equivalent to the new-issue debt. My bond is still paying 1.5% and will still pay $100 when it matures, but it's much less valuable since the interest stream is smaller. I don't sell my bond because I don't want to take the loss. Year 5: My bond matures and I receive $100 along with the final interest payment. We're talking about step 2 above -- the losses are only realized if you sell the instrument, so you don't need to "recover" any losses, the underlying debt is still as likely to pay out as they were before, it's just a debt maturity question.
bjacokes 4y ago
In 2008 the Fed was decreasing interest rates, which helped support asset prices. Banks held a lot of bad loans which were worth much less than their balance sheets showed. Both of these factors could have caused the unrealized losses in 2008 to look somewhat small, but the high leverage at banks caused forced asset sales, and the uncertainty around credit losses led to asset prices tanking. In 2023 the situation isn't necessarily worse, but it is certainly different. Asset prices seem relatively well-understood, in that their declines are a straightforward function of interest rates as opposed to an uncertain function of credit losses. Bank leverage is less than in 2008 as a result of regulation. If the situation in 2008 was "some banks are _super_ insolvent, and it's hard to tell which ones", in 2023 it seems to be "some banks are mildly insolvent, and it's fairly clear which ones". A mildly insolvent bank can probably stay afloat as long as it continues to have access to capital, which the Fed is giving them. But if people start withdrawing their deposits from one of the mildly insolvent banks, it will become increasingly difficult for that bank to dig out of even a small solvency hole, so there's still some uncertainty as to whether the Fed lifeline is enough to save them.
fwlr 4y ago
Everyone will say they are “unrealized” losses. Some people (let’s call them “busters”) will argue this means real losses that already happened but banks are allowed to pretend it hasn’t. Other people (let’s call them “holders”) will argue these losses aren’t real and will only become real if the bank is forced to sell them, while if they manage to hold onto them for the full ten years then the losses never become real and vanish. The truth is roughly that both sides are right, and the sum of their claims is much weirder than either subset. The actual instrument in question is a little tough to get your head around. The first part is the basic bond mechanism: you give the government a thousand bucks, and ten years later they give you back that thousand dollars (guaranteed: they can print money so they will never default, only risk is they have to print so much money to pay you back that the economy explodes, and everyone has bigger problems at that point). Why would you do this? You wouldn’t, there is no upside, you only get back what you put in and it’ll be worth a little less because of inflation by then as well. Nobody does it, so right now what we have is not a real financial instrument. So let’s make a first attempt at offering some upside: if you let them hold a thousand bucks for ten years, they’ll give you 10 bucks twice a year. Now you’ll take it - unless you think you can make more than 20 dollars out of your 1000 dollars each year by putting it somewhere else. What controls how much you can make on your 1000 dollars elsewhere? A lot of factors that all ultimately rest on the interest rate. Okay, so the government can’t just offer a flat 10 bucks twice a month, they have to offer something competitive with the current interest rate. But there’s the kicker: the current interest rate. Once you buy the bond, that amount is fixed, even if the interest rate later changes. If the interest rates go up after you buy a bond, next years bonds will be offering higher per-year payments, so your bonds are inferior by comparison (they pay the same at the end, but less on the way, and they’ve already paid out some of the payments to you) and thus are worth a lot less. This is important because aside from holding them you can also sell them to someone else for any price you agree on, and whoever buys them from you gets the rest of the yearly payments and the final payout instead of you. They’re a hard thing to sell if interest rates have gone up, because you’re offering 20 bucks a year for five years while the government is offering 50 bucks a year for 10 years. So: the money you get back eventually is worth less than when you handed it over because of inflation, but you’re getting small payments all along the way based on the interest rate at the time of the agreement. You care about interest and about inflation. We have to stop for a moment and talk about interest rates and inflation. It is generally accepted that an increase in interest rates will cause a decrease in inflation a few years later. Confusingly, people will also say that interest rates move in the same direction as inflation but with a lag. It’s not that confusing though: an increase in inflation at time t=0… …will cause an increase in interest rates at time t=1… …which will cause a decrease in inflation at time t=2… (…which will cause a decrease in interest rates at time t=3…) (…which will cause an increase in inflation at time t=4, and we’re back to step 1) And so the cycle goes. So in effect, you’re betting on this tension between interest and inflation resolving in your favor. In practice I believe the effect of inflation is smaller than the interest payments, so it’s also generally believed you always have a way out of the bet: just hold for the full ten years and the interest payments over that time will more than cover the inflation loss. Except you can’t just hold on to the bet, because you’re a bank, and that thousand dollars you gave to the government is not your thousand dollars - it is some customer’s deposit, and they might want it back. So you better plan to have another thousand dollars somewhere else that you can give that customer, because the only way you can turn this bond back into money before the 10 years is up is selling it. And as mentioned before, if interest rates have recently gone up, your bond is not going to sell for anywhere close to breaking even. That’s what that unrealized loss figure of 600 billion is: if you sold them for market value today, how much would you lose? As pointed out in the article, because interest rates were extremely low when these bonds were made, their yearly payout is very low. Because interest rates have risen rapidly, new bonds have much higher yearly payouts. And because interest rates have risen recently, we’re still in the lag period before inflation falls, so the final payout is also worth less (once again, I believe the effect of inflation differential is smaller here, and the price is I think mostly driven by the interest rate differential). Concretely, right now, you could probably sell those bonds for no more than 75 cents on the dollar, and likely closer to 65 cents. If the Fed keeps raising interest rates like they’re doing now until the end of the current Presidential term (where someone else will get to tell the Fed what to do), we might get below 50 cents on the dollar, or even lower. Banks bought 2 trillion dollars of an asset and right now that asset is only worth 1.4 trillion. That is, objectively, a huge loss. Point to the busters. …But if we just hold the asset long enough, it is worth about 2 trillion again. Point to the holders, and this is why we call them “unrealized” losses. …But if we can’t hold the asset (because, say, everyone withdraws at the same time), we have to sell at the current market rate, and those losses are forced to be realized. Point once more to the busters. …But if we can rely on the FDIC or the government or other banks to step in and cover our withdrawals, we aren’t forced to sell - we can hold until the value returns, and pay back the FDIC or the government or the other banks then. Point once more to the holders. And so it goes, back and forth between the busters and the holders. Who is right? In aggregate it’s both and neither, but at specific times for specific banks it could very visibly be one or the other. No wonder it’s so confusing! There’s a lot more of these back and forths at every level that further complicate things. The government is jacking up interest rates so they’re causing the pressure… but banks know this dynamic exists and didn’t prepare for it so they made themselves vulnerable to this pressure… but the government regulations make these investments much more attractive to banks (very roughly: regulations say you only have to put up 0-20% of the value of these investments as collateral, for other investments it could be 100% or even 400% collateral) so the government pushed the banks in this direction… and so this cycle goes, too. The fundamental dynamic is these bonds were an easy investment that turned into a giant Sword of Damocles over your head that’s growing by the day. In ten years you can step out from under the Sword, but any day now your depositors might panic and drop it on you, but if they do drop it the government might catch it before it kills you. Thus, finally, some insight into the title of the post: very uncertain times indeed.

airstrike 4y ago

these are unrealized losses so not necessarily significant if just held to maturity or sold when prices are less punishing they can be an issue if, say, all your depositors decide to make huge withdrawals and the bank's immediate cash needs balloon, or if they have specific payments they need to make in the near term which would force those "available for sale" securities to be actually sold none of this is an inevitable risk. there are ways to hedge against rising rates. the current rate hikes, although historic in their pace, have also long been anticipated by the market and telegraphed by the Fed. that bank administrators failed to plan accordingly is honestly baffling

O__________O 4y ago
Possible I am missing something, but your response appears to assume the securities will recover their loses prior to being sold and/or that these unrealized losses do become actual losses, should banks need to sell securities to meet liquidity needs. Without additional context, seems like wishful thinking to believe such losses will ever be recovered. In fact, while I might be wrong, those unrealized losses assume current market conditions; meaning they do not represent the actual total assets at potentially at risk; might be wrong about this. Am I missing something?
- hn_throwaway_99 4y ago
  > Am I missing something? Yes. As bonds get closer to their maturity date, the discount one would have to sell them at to garner a higher prevailing interest rate goes away. That is, the nominal loss "naturally" goes away over time. The article kind of explains this.
- delfinom 4y ago
  They are unrealized losses if the assets are sold at market. They are not losses if the assets are held to maturity.
- kortilla 4y ago
  They are bonds. Unless they default they will eventually reach maturity and pay out the original gain. The problem is that might be a 20% gain 10 years from now, so nobody will be willing to buy that bond off of you for the price you paid since they can 40% on new 10 year bonds. The only time a bond price decline is concerning is if you have to sell it rather than holding to maturity.
- mikeyouse 4y ago
  The point with bonds is that they'll "recover their losses" if you hold them to maturity. Think about three time frames: Year 0: I buy a new-issue $100 bond paying 1.5% interest for $100. I will receive $1.50 every year for 5 years and then get $100 back. Year 3: Interest rates have increased pretty dramatically, so 2-year bonds are now paying 3% interest. So for someone 'shopping' for a bond that matures in 2 more years, they can buy a new-issue one paying 3% or they could buy my 5-year with 2-years remaining that is only paying 1.5%. Obviously they would buy the new-issue unless I offer a substantial price discount. So if I "mark to market" my bond, I would have to sell it for something like $85 to be equivalent to the new-issue debt. My bond is still paying 1.5% and will still pay $100 when it matures, but it's much less valuable since the interest stream is smaller. I don't sell my bond because I don't want to take the loss. Year 5: My bond matures and I receive $100 along with the final interest payment. We're talking about step 2 above -- the losses are only realized if you sell the instrument, so you don't need to "recover" any losses, the underlying debt is still as likely to pay out as they were before, it's just a debt maturity question.

bjacokes 4y ago

In 2008 the Fed was decreasing interest rates, which helped support asset prices. Banks held a lot of bad loans which were worth much less than their balance sheets showed. Both of these factors could have caused the unrealized losses in 2008 to look somewhat small, but the high leverage at banks caused forced asset sales, and the uncertainty around credit losses led to asset prices tanking. In 2023 the situation isn't necessarily worse, but it is certainly different. Asset prices seem relatively well-understood, in that their declines are a straightforward function of interest rates as opposed to an uncertain function of credit losses. Bank leverage is less than in 2008 as a result of regulation. If the situation in 2008 was "some banks are _super_ insolvent, and it's hard to tell which ones", in 2023 it seems to be "some banks are mildly insolvent, and it's fairly clear which ones". A mildly insolvent bank can probably stay afloat as long as it continues to have access to capital, which the Fed is giving them. But if people start withdrawing their deposits from one of the mildly insolvent banks, it will become increasingly difficult for that bank to dig out of even a small solvency hole, so there's still some uncertainty as to whether the Fed lifeline is enough to save them.

fwlr 4y ago

Everyone will say they are “unrealized” losses. Some people (let’s call them “busters”) will argue this means real losses that already happened but banks are allowed to pretend it hasn’t. Other people (let’s call them “holders”) will argue these losses aren’t real and will only become real if the bank is forced to sell them, while if they manage to hold onto them for the full ten years then the losses never become real and vanish. The truth is roughly that both sides are right, and the sum of their claims is much weirder than either subset. The actual instrument in question is a little tough to get your head around. The first part is the basic bond mechanism: you give the government a thousand bucks, and ten years later they give you back that thousand dollars (guaranteed: they can print money so they will never default, only risk is they have to print so much money to pay you back that the economy explodes, and everyone has bigger problems at that point). Why would you do this? You wouldn’t, there is no upside, you only get back what you put in and it’ll be worth a little less because of inflation by then as well. Nobody does it, so right now what we have is not a real financial instrument. So let’s make a first attempt at offering some upside: if you let them hold a thousand bucks for ten years, they’ll give you 10 bucks twice a year. Now you’ll take it - unless you think you can make more than 20 dollars out of your 1000 dollars each year by putting it somewhere else. What controls how much you can make on your 1000 dollars elsewhere? A lot of factors that all ultimately rest on the interest rate. Okay, so the government can’t just offer a flat 10 bucks twice a month, they have to offer something competitive with the current interest rate. But there’s the kicker: the current interest rate. Once you buy the bond, that amount is fixed, even if the interest rate later changes. If the interest rates go up after you buy a bond, next years bonds will be offering higher per-year payments, so your bonds are inferior by comparison (they pay the same at the end, but less on the way, and they’ve already paid out some of the payments to you) and thus are worth a lot less. This is important because aside from holding them you can also sell them to someone else for any price you agree on, and whoever buys them from you gets the rest of the yearly payments and the final payout instead of you. They’re a hard thing to sell if interest rates have gone up, because you’re offering 20 bucks a year for five years while the government is offering 50 bucks a year for 10 years. So: the money you get back eventually is worth less than when you handed it over because of inflation, but you’re getting small payments all along the way based on the interest rate at the time of the agreement. You care about interest and about inflation. We have to stop for a moment and talk about interest rates and inflation. It is generally accepted that an increase in interest rates will cause a decrease in inflation a few years later. Confusingly, people will also say that interest rates move in the same direction as inflation but with a lag. It’s not that confusing though: an increase in inflation at time t=0… …will cause an increase in interest rates at time t=1… …which will cause a decrease in inflation at time t=2… (…which will cause a decrease in interest rates at time t=3…) (…which will cause an increase in inflation at time t=4, and we’re back to step 1) And so the cycle goes. So in effect, you’re betting on this tension between interest and inflation resolving in your favor. In practice I believe the effect of inflation is smaller than the interest payments, so it’s also generally believed you always have a way out of the bet: just hold for the full ten years and the interest payments over that time will more than cover the inflation loss. Except you can’t just hold on to the bet, because you’re a bank, and that thousand dollars you gave to the government is not your thousand dollars - it is some customer’s deposit, and they might want it back. So you better plan to have another thousand dollars somewhere else that you can give that customer, because the only way you can turn this bond back into money before the 10 years is up is selling it. And as mentioned before, if interest rates have recently gone up, your bond is not going to sell for anywhere close to breaking even. That’s what that unrealized loss figure of 600 billion is: if you sold them for market value today, how much would you lose? As pointed out in the article, because interest rates were extremely low when these bonds were made, their yearly payout is very low. Because interest rates have risen rapidly, new bonds have much higher yearly payouts. And because interest rates have risen recently, we’re still in the lag period before inflation falls, so the final payout is also worth less (once again, I believe the effect of inflation differential is smaller here, and the price is I think mostly driven by the interest rate differential). Concretely, right now, you could probably sell those bonds for no more than 75 cents on the dollar, and likely closer to 65 cents. If the Fed keeps raising interest rates like they’re doing now until the end of the current Presidential term (where someone else will get to tell the Fed what to do), we might get below 50 cents on the dollar, or even lower. Banks bought 2 trillion dollars of an asset and right now that asset is only worth 1.4 trillion. That is, objectively, a huge loss. Point to the busters. …But if we just hold the asset long enough, it is worth about 2 trillion again. Point to the holders, and this is why we call them “unrealized” losses. …But if we can’t hold the asset (because, say, everyone withdraws at the same time), we have to sell at the current market rate, and those losses are forced to be realized. Point once more to the busters. …But if we can rely on the FDIC or the government or other banks to step in and cover our withdrawals, we aren’t forced to sell - we can hold until the value returns, and pay back the FDIC or the government or the other banks then. Point once more to the holders. And so it goes, back and forth between the busters and the holders. Who is right? In aggregate it’s both and neither, but at specific times for specific banks it could very visibly be one or the other. No wonder it’s so confusing! There’s a lot more of these back and forths at every level that further complicate things. The government is jacking up interest rates so they’re causing the pressure… but banks know this dynamic exists and didn’t prepare for it so they made themselves vulnerable to this pressure… but the government regulations make these investments much more attractive to banks (very roughly: regulations say you only have to put up 0-20% of the value of these investments as collateral, for other investments it could be 100% or even 400% collateral) so the government pushed the banks in this direction… and so this cycle goes, too. The fundamental dynamic is these bonds were an easy investment that turned into a giant Sword of Damocles over your head that’s growing by the day. In ten years you can step out from under the Sword, but any day now your depositors might panic and drop it on you, but if they do drop it the government might catch it before it kills you. Thus, finally, some insight into the title of the post: very uncertain times indeed.