This is a ticking time bomb not just in the U.S., but Europe, China, and Japan as well. From Wolf Richter at wolfstreet.com:
How do you lose 47% on 30-year Treasuries? Buy at auction in Aug 2020. Or you can carry them at purchase price and hide the “unrealized loss” in the footnotes.
“Unrealized losses” on securities triggered the bank panic earlier this year, in that uninsured depositors with millions or billions of dollars at these banks suddenly started looking at the footnote on page 125 of Silicon Valley Bank’s Q4 2022 quarterly report, and saw this thing about “unrealized losses,” and got scared and yanked their money out, electronically, all together in no time, engineering the fastest bank runs in history that took down Silvergate Capital, Silicon Valley Bank, Signature Bank, and First Republic. And this formerly boring line item hidden deep down in the footnotes was transformed into a hotly important indicator of where the entire financial system stands.
“Unrealized losses” are paper losses on securities that banks hold, but via a quirk in bank regulations, they don’t have to mark them to market value, but can carry them at purchase price.
On one level, it makes sense.
The closer the bonds get to the maturity date, the closer the market value gets to face value, and the unrealized losses vanish, and on the day the bonds mature, the banks get paid face value, and there are no losses, and everyone smiles.
