According to figures published by the Federal Bank Deposit Insurance Corporation in the United States, Bank of America losses from its investments in debt securities amounted to about $100 billion by the end of the first quarter of 2023.
According to a report by the Financial Times, on Saturday, the bank’s losses exceed its peers by a huge difference and represent about a fifth of the combined losses of US banks from the bond market turmoil.
This is due to wrong strategic decisions by investing the second largest bank in America with large deposits in bonds three years ago at the height of the Corona epidemic crisis.
Bank of America bought the largest amount of debt securities offered during that period, at a value of $670 billion.
The bank got excited with the huge increase in its deposits during the closing period during the Corona epidemic crisis in 2020.
Bond prices were high at the time, while the return on them was very low, but now with the strong yield on bonds rising and consequently decreasing their value, the banks that invested in bonds from their deposit funds incur that difference, which called unrealized losses, or as it is common.
Paper loss in reference to bond papers and the difference in their value from the time they were purchased from the time they were valued as an asset in the possession of their owner.
And while Bank of America invested a large amount of its depositors’ money by buying bonds during that time, most of the major banks in the United States kept the largest amount of their deposit money in cash, which spared them large paper losses now with the collapse in the value of debt securities and the rise in rate of return on it.
The details of what announced by the Federal Bank Deposit Insurance Corporation, we find that the unrealized losses in the bond market for the largest bank in America “JP Morgan Chase” are in the range of $ 40 billion.
The losses of Wells Fargo, the third largest US bank, also amount to about $40 billion.
As for the fourth largest bank in America, Citigroup, its paper losses in the bond market are around $25 billion.
The Federal Commission announced that the total unrealized losses from investing in bonds at the end of the first quarter amounted to 515 billion dollars, while the share of Bank of America was about a fifth of those losses, and the rest distributed among about four thousand and 600 US banks that invested in debt securities.
Veteran banking analyst Dick Bove says, “Brian Moynihan (CEO of Bank of America) has done an exceptional job in managing the bank’s operations… If we look at the bank statement, we find that it is in a state of chaos”.
Bank of America announced that it does not intend to get rid of its portfolio of debt securities at present, in order to avoid converting paper losses into real losses.
As long as the bank keeps the bonds in its portfolio, these unrealized losses are on paper only, and become real material when it sells the bonds, just as most of the bonds in the possession of Bank of America are government-guaranteed securities, which means that they will often repaid at the end of the debt bond’s term. .
However, keeping the bank in possession of long-term investments with a low rate of return, such as debt securities secured by mortgage loans, for a period of 30 years, will not be the optimal investment for depositors’ money, while debt securities that can be purchased currently provide a rate of return that increases by up to Four times more than the one the bank bought three years ago.
In addition, since the bank’s most important job is to achieve the best return from the investment of its depositors’ money, Bank of America partially deviates from that goal with its large portfolio of debt securities.
It’s true that the long years of low interest rates near zero, increased procedural restrictions, and weak economic growth prompted most banks to pump more deposits of their customers into bonds and other debt securities, but the matter also depended on the investment strategies of each bank.
According to figures from the Federal Bank Deposit Insurance Corporation, from the end of 2019 until the middle of last year 2022, all banks’ holdings of securities, most of which are treasury bonds or debt securities secured by mortgage loans, increased by 54 percent, or by two trillion dollars.
This is what put the banks in a position to face unrealized losses, or on paper, because of their large holdings of bonds, but it remains that Bank of America will not have to sell the bonds at large losses that cause it a problem, as happened with the Silicon Valley bank, which It collapsed last March, and the bank has cash assets amounting to $370 billion, so it is not facing a liquidity crisis like the one that caused the collapse of regional banks three months ago.