eir bond portfolios if they are able to hold on to them until maturity. But if they suddenly have to sell the bonds at a loss to raise cash, that is when accounting rules require them to show the realized losses in their earnings.
Those rules let companies exclude losses on their bonds from earnings if they classify the investments as “available for sale” or “held to maturity.”
At SVB, unrealized losses had been piling up throughout last year and were visible to anyone reading its financial reports.
The Federal Deposit Insurance Corp. in February reported that U.S. banks’ unrealized losses on available-for-sale and held-to-maturity securities totaled $620 billion as of Dec. 31, up from $8 billion a year earlier before the Fed’s rate push began.
U.S. commercial banks’ holdings of U.S. government securities surged 53% over the same period, to $4.58 trillion, according to Fed data.
 
Most of the unrealized investment losses in the banking system are at the largest lenders. In its annual report, Bank of America said the fair-market value of its held-to-maturity debt securities was $524 billion as of Dec. 31, 2022, $109 billion less than the value it showed for them on its balance sheet.
 
On the other hand, unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,” FDIC Chairman Martin Gruenberg said in a March 6 speech.
 
The risks are most acute for small lenders. Smaller banks must often pay higher deposit rates to attract customers than megabanks with flashy technology and extensive branch networks. Bank of America paid an average rate of 0.96% on deposits in the fourth quarter, compared with 1.17% for the industry. SVB paid 2.33%.
SVB’s debt securities declined in value substantially last year. As of Dec. 31, SVB’s balance sheet showed securities labeled “available for sale” that had a fair market value of $26.1 billion, $2.5 billion below their $28.6 billion cost. Under accounting rules, the available-for-sale label allowed SVB to exclude the paper losses on those holdings from its earnings, although the losses did count in equity.
 
In a news release Wednesday, SVB said it had sold substantially all of its available-for-sale securities. The company said it decided to sell the holdings and raise fresh capital “because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses.”
 
SVB’s year-end balance sheet also showed $91.3 billion of securities that it classified as “held to maturity.” That label allows SVB to exclude paper losses on those holdings from both its earnings and equity.
 
In a footnote to its latest financial statements, SVB said the fair-market value of those held-to-maturity securities was $76.2 billion, or $15.1 billion below their balance-sheet value. The fair-value gap at year-end was almost as large as SVB’s $16.3 billion of total equity.