The Office of the Comptroller of the Currency joined the Federal Deposit Insurance Corp. in expressing concern over mounting unrealized losses in U.S. banks' securities portfolios.
In its Fall 2022 Semiannual Risk Perspective report, the agency named investment portfolio depreciation as a key risk for U.S. banks. The report, released Dec. 8, comes just one week after FDIC acting Chairman Martin Gruenberg expressed similar concerns.
"Investment portfolio depreciation affects banks' access to timely and cost-effective wholesale sources of funding through reduced fair market values for collateral pledging or to meet margin requirements," according to the report.
The OCC expects these losses to remain unrealized "as long as banks maintain sufficient access to efficient sources of liquidity," the report read.
However, "while liquidity remains robust, declining liquidity buffers in a period of rising rates and quantitative tightening could have a material impact on earnings and capital if a bank needs to liquidate securities," it added.
The report urged banks to use a "robust" set of scenarios while stress testing for liquidity and interest rate risk management. Banks should understand the potential outcomes and risks to earnings and capital and ensure that contingency funding plans are "current and robust," the report said.
"These stress scenarios can help banks understand the effects of further depreciation in investment portfolio values and whether wholesale sources, such as borrowing lines and repurchase agreements, will remain accessible and at sufficient levels to meet potential liquidity needs. Scenarios involving liquidation of depreciated securities to maintain sufficient liquidity can support assessments of earnings and capital impacts from realized investment portfolio losses," the report read.
Deposit stability and potential runoff should be a "key consideration" in testing, according to the agency.
Regulators have grown increasingly worried about mounting losses in banks' bond books as funding pressures have intensified.
The majority of bonds that most banks hold are in available-for-sale, or AFS, portfolios, which must be marked to market on a quarterly basis. Changes in the values of the AFS portfolios are captured in accumulated other comprehensive income, or AOCI.
Higher interest rates have weighed on the value of bonds that banks own since they now carry below market rates. As a result, unrealized losses in securities portfolios of banks accelerated in the third quarter, and U.S. banks posted AOCI losses of $347.83 billion in the third quarter, bringing the total for the first nine months of the year to $771.39 billion, according to a recent analysis by S&P Global Market Intelligence.
With the widespread deterioration of securities portfolios, more than 4,000 U.S. banks posted AOCI deterioration in the third quarter while only 40 posted a year-over-year improvement, and 110 posted a quarter-over-quarter improvement.
