Recovering banks face ‘sizeable’ hit to equity from bond yield surge

The recovery in global banks’ balance sheets is under threat from a surge in bond yields, according to senior bank executives and analysts.

Banks have built huge portfolios of liquid securities, partly at the behest of regulators and also because they have not found better opportunities to lend a flood of deposits.

Under new rules, unrealised losses in these “available for sale” portfolios hit banks’ equity capital.

“Most institutions are going to have a fairly sizeable hit to their equity,” said a senior executive of a top US bank.

The composition of balance sheets leaves banks vulnerable to the rise in rates. Bank of America has a $315 billion securities portfolio, 90 per cent in mortgage-backed securities and Treasuries. As yields rise, prices fall.

In the US, the unrealised net gains on AFS portfolios has slumped to $16.7 billion, its lowest level in two years, according to Federal Reserve data – a drop of more than 50 per cent in two months.

Yields on the benchmark 10-year Treasury note last week jumped by the biggest percentage in a decade as Ben Bernanke, Fed chairman, indicated the central bank might scale back its bond-buying. Yesterday, yields rose 3 basis points to about 2.58 per cent.

Some trading portfolios could report losses immediately when US banks post second-quarter earnings in two weeks. The fall in value of larger AFS portfolios is not immediately reflected in income but does hit tangible book values under new global rules.

– (Copyright The Financial Times Limited 2013)