Data Analysis: Unbooked Losses at Banks Rise in Second Quarter

Some banks in America could be at serious risk as unbooked losses in their securities portfolios ticked up in the second quarter of the year, according to an analysis by a finance expert at Florida Atlantic University.

Total unbooked losses on securities at all U.S. banks rose to $559 billion in the second quarter of 2023, up from $516 billion in the first quarter of 2023, according to an analysis conducted by Rebel A. Cole, Ph.D., Lynn Eminent Scholar Chaired Professor of Finance in FAU’s College of Business. It was a slight decrease from the last quarter of 2022, when unbooked losses reached over $620 billion.

 Looking at banks with more than $1 billion in assets, 78 banks had unbooked security losses equal to at least 50 percent of their equity capital, including Bank of America, where unbooked security losses equaled $109 billion or 57 percent of its capital; Charles Schwab, where losses equaled $23.5 billion or 75 percent of its capital; and USAA Federal Savings Bank, where losses equaled $5.8 billion or 64 percent of its capital.

Cole also found that at least six smaller banks had unbooked security losses that exceeded their equity capital.

“These banks have serious problem in terms of their exposure to interest-rate risk,” Cole said. “It’s possible that this could lead to failures of some of these during the next year.” 

An “unbooked loss” is the difference between the book value and the market value of a security. To calculate the exposure to risk, Cole used the most recently available data from the June 30 Bank Call Report Data. The dataset included 4,697 banks, from which Cole focused on banks with more than $1 billion in assets, or 997 banks, to calculate unbooked losses on securities and compare that to the bank’s Common Equity Tier 1 Capital (CET1) to find the banks that were most at risk from their exposures.

The unprecedented increase in interest rates from the first quarter of 2022 to the second quarter of 2023 was responsible for the rise in unbooked security losses for banks, according to Cole.   

“The 10-year treasuries were yielding 1.51 percent at the end of 2021, but rose to 3.82 percent at the end of June 2023. Since then, yields have risen significantly to more than 4.30 percent, so that it is likely that unbooked losses are even larger today,” Cole added. “It’s likely that some of these banks could fail within the next year.”

-FAU-