US banks are facing growing losses on their bond investments as Treasury yields rise. Banks must decide whether to sell bonds worth billions of dollars at a loss or continue holding them and carry the losses on their balance sheets.
The dangers of bond losses became clear during the 2023 banking crisis. Silicon Valley Bank collapsed in 2023 after suffering large losses on its bond investments while many customers quickly withdrew their money. Banks have reduced some of their exposure to these risks since the 2023 crisis.
Higher interest rates could put further pressure on banks’ financial strength. However, the latest increase in Treasury yields shows that investment decisions made years ago can continue to hurt banks when interest rates change.
Brian Mulberry, chief market strategist at Zacks Investment Management, said that if interest rates remain high or long-term Treasury yields rise further, banks could continue facing pressure on their tangible equity and, in some cases, regulatory capital.
Banks delay share buybacks
Chief Financial Officer Mike Santomassimo told analysts that the bank would continue to consider interest rate conditions and their impact on AOCI when deciding how many shares to repurchase, Reuters reported. Higher interest rates are also affecting banks’ plans to buy back their own shares. A share buyback is when a company buys its own shares to return money to its shareholders. However, losses on bonds and rules about how much money banks must keep could make them more careful about spending money on buybacks. Truist is changing its bond portfolio to manage the impact of interest rates and capital rules. PNC is also considering the impact of Basel III when reviewing its bond losses.
Wells Fargo said interest rates could influence its future share buybacks. Chief Financial Officer Mike Maguire said the bank could sell more securities, but the number of bonds it could realistically sell was limited. Bank executives said they were taking the upcoming capital rules into account while evaluating the bank’s AOCI holdings, according to Reuters.
Bank of America’s accumulated losses on some investments increased by more than $3 billion in the three months ending September 30, compared with the end of June, Reuters reported. Bank of America reported a sharp increase in its unrealized bond losses.
