Unrecognized losses on bank securities rose by 60% during the fourth quarter to $19.2 billion, according to a report by Veribanc Inc.
The Wakefield, Mass., company's analysis of Federal Reserve data determined that losses had jumped from $12 billion in the third quarter, reflecting further damage due to higher interest rates.
The loss represents the difference between purchase cost and market value of held-to-maturity securities. The totals do not reflect the offsetting liability fluctuations, some analysts pointed out.
"There is still a lot of commitment to securities holdings," said Warren Heller, Veribanc's research director. "It's surprising that securities would be that sensitive at this point."
As interest rates increase, the value of fixed-rate securities falls, said Ross Waldrop, a senior financial analyst at the Federal Deposit Insurance Corp.
Banks endured the greatest losses in their holdings of foreign debt securities, at more than 14% in their held-to-maturity portfolios, according to data from the FDIC.
Collateralized mortgage obligations and real estate mortgage investment conduit caused more than 5.8% of the losses.
Mortgage-backed securities depreciated by more than 5%.
Despite the presumed sophistication of large banks, those with assets in excess of $1 billion fared little better than smaller banks.
Unrealized mortgage derivatives losses were 5.8% in large banks, while they were 6% in small banks.
"We had a thesis that the small banks in general are suffering worse, but we blew that apart," said Mr. Heller."Small banks have less depreciation and fewer mortgage derivatives among their held-to-maturity securities."
The highest ratios of unrealized securities losses to equity were at small banks - 119.7% at Houston-based Coastal Bank Savings Association and 110.9% at Lincoln Trust Co. of Englewood, Colo.
While bank securities might currently be valued at below market price, that doesn't necessarily spell trouble for the industry.
"There are no necessary implications for banks' net worth or for the possibility that (unrecognized losses) would produce a loss on banks' income statement," said Mr. Waldrop. "All other things being equal, it might just lower the average yield on their assets."
Moreover, if securities designated held-to-maturity are not transferred to available-for-sale, then banks do not have to realize a loss on their equity. However, the sale of securities that are declining in market value will affect earnings over time.
"There could be a more gradual withering from a low level of performance," said Mr. Waldrop.
Others point out that unrecognized securities losses represents only one side of the equation: they don't take into consideration the fluctuation in the value of liabilities.
Nonetheless, unrecognized securities losses, which could affect earnings in the long term, may continue to increase, especially since the current figures do not include the 50 basis point interest rate increase by the Federal Reserve on Feb. 1.
"It would be easy to see another $5 billion added to the depreciation," said Mr. Heller.