|Of course, just because something isn’t realized doesn’t mean it’s completely risk-free.
They said the Titanic was unsinkable, and we all know how that ended.
I don’t mean to be a fearmonger, but perception can quickly become a reality, especially with Wall Street’s herd mentality. A firm could have no plans of selling its bonds for a loss. But if enough people fear they might do it, things can escalate quickly. Lest we forget Silicon Valley Bank.
To be sure, big banks are better capitalized than SVB. Bank of America, which is sitting on some $130 billion in paper losses, has been adamant about its intention to hold its government securities to maturity.
But circumstances change. While the bond sell-off has cooled, there’s always a risk it could spike again, putting even more pressure on banks to eventually pull the trigger.
Even if things don’t get so dire, those unrealized losses still feel pretty real to investors. Big banks’ share prices noticeably dropped as bond prices sunk.
Therein lies the biggest issue. Regulations already limit banks’ balance sheets. Having more capital tied up in these bonds only further hamstrings lenders. And it couldn’t come at a worse time, as new players keep pushing into their territory.