Banks’ Unrealized Losses, Part 2: Comparing to SVB
link to page 2 
INSIGHTi
Banks’ Unrealized Losses, Part 2: Comparing
to SVB
September 1, 2023
Part 1 of this two-part Insight discusses a new proposed rule that would require all banks with over $100
billion in assets to include unrecognized gains and losses on available for sale (AFS) debt securities (via
the inclusion of accumulated other comprehensive income [AOCI]) in capital. Part of the motivation for
the proposal is the role that unrealized capital losses played in the failure of Silicon Valley Bank (SVB) in
2023.
Under the Fed’s enhanced prudential regulatory (EPR) framework, SVB elected not to include AOCI in
common equity Tier 1 (CET1). Although SVB qualified as well-capitalized under capital rules in 2022, its
capital was rapidly depleted in the days before its failure when it sold securities that had fallen in value at
a loss to meet large and sudden deposit outflows. According to the Fed’s report on SVB’s failure, had
EPR requirements not been changed following P.L. 115-174, SVB would have become an Advanced
Approaches bank subject to AOCI requirements in the second quarter of 2020. Had SVB been subject to
this requirement (as an Advanced Approaches bank or under the new proposal), the Fed estimates that
SVB’s potential losses would have been reflected in its CET1 earlier, as its CET1 value would have fallen
by $1.9 billion (1.7 percentage points) at the end of 2022.
Comparing SVB to Other Large Banks Subject to the
Proposal
SVB had unrealized losses on its securities primarily because rising interest rates caused their value to
fall—an issue affecting all banks, as discussed in part 1. As Figure 1 illustrates, some banks subject to the
proposed rule had large unrealized AFS losses as a percentage of CET1 at the end of 2022, and some
banks would have come close to falling below the 6.5% CET1 ratio required to be well capitalized if
unrealized losses were subtracted from their CET1.
SVB was unusually vulnerable to unrealized losses, however. According to the Fed, SVB’s total securities
holdings as a share of total assets (55%) were more than double its peers. According to Federal Deposit
Insurance Corporation Vice Chair Travis Hill, SVB invested more than half of its assets in long-term
Congressional Research Service
https://crsreports.congress.gov
IN12232
CRS INSIGHT
Prepared for Members and
Committees of Congress
link to page 2
Congressional Research Service
2
Treasuries and Agency securities, of which 79% had a remaining maturity exceeding 10 years. The longer
the maturity of the bond, the more it will fall in value when interest rates rise.
Figure 1. CET1 Levels With and Without Unrealized Losses on AFS Securities
Banks Affected by Proposed Rule That Reported Data
Source: CRS calculations.
Notes: For reference, the dashed line shows the 6.5% well-capitalized category under prompt corrective action (PCA).
These calculations are not official for PCA purposes.
Notably, SVB did not stand out relative to its peers in Figure 1 in terms of low capital levels—with or
without unrealized AFS losses subtracted—in part because SVB classified most of its securities as held to
maturity (HTM). According to Hill, HTM securities accounted for 85% of SVB’s securities losses—“a
link to page 3
Congressional Research Service
3
percentage that may have been higher had the bank’s capital requirements incentivized such a shift.” One
study found that 10% of banks had larger unrealized losses (for AFS and HTM securities) than SVB, 10%
had less capital than SVB, and 1% had a higher share of uninsured deposits. Figure 2 illustrates that if
unrealized losses on HTM securities were included, SVB’s securities holdings and unrealized losses as a
percentage of assets were significantly higher than all other banks affected by the proposal.
Figure 2. AFS and HTM Securities Holdings and Unrealized Losses
Banks Affected by Proposed Rule That Reported Data
Source: CRS calculations.
Notes: For HTM securities, unrealized losses are proxied as the difference between amortized value and fair value.
Unrealized gains and losses on HTM securities are excluded from regulatory capital under the proposal,
however, as they are never likely to be realized (because banks do not intend to sell them). This creates an
opportunity for regulatory arbitrage if improper classification of securities is not adequately guarded
against. (Generally accepted accounting principles [GAAP] include restrictions against improper
classification.) The regulators report that banks that include AOCI in capital have a higher share of
securities classified as HTM, and one study found that banks shifted $900 billion in securities to HTM
during 2022, when rates were rising, allowing them to avoid $175 billion in losses. It also found that
banks were more likely to shift if they had lower capital, higher uninsured deposits, and more interest rate
risk. Another study found a 15% increase in likelihood that a bank would classify a security as HTM
when it was subject to AOCI. A third study found unintended consequences of including AOCI in capital,
such as increased borrowing, as banks cannot easily sell HTM securities when they need liquidity.
Would SVB have changed its behavior (or been forced by its creditors or regulators to change) sooner if
AOCI had been included in its regulatory capital? Although its capital would have been significantly
lower, it would still have remained well capitalized. One can speculate whether the regulatory capital hit
would have caused enough concern to spur changes, but information on its unrealized losses was publicly
Congressional Research Service
4
available. Banks report unrealized losses on securities in their quarterly call reports and in their public
filings, and AOCI is included in equity under GAAP. Yet SVB was neither downgraded by rating agencies
nor assigned a “sell” rating by the vast majority of equity analysts before its failure, according to the Fed.
Regulators could manage interest rate risk through supervision instead of capital requirements, but that
depends on effective supervision. Supervisors have long been alert to interest rate risk—a major cause of
the savings and loan crisis in the 1980s—and it has been highlighted repeatedly in recent years by the
Financial Stability Oversight Council and bank regulators. In that regard, SVB serves as a cautionary tale.
The Fed’s report notes that the Fed planned to downgrade SVB’s interest rate risk management to less
than satisfactory but failed to take action before SVB collapsed.
Author Information
Marc Labonte
Specialist in Macroeconomic Policy
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.
IN12232 · VERSION 1 · NEW
INSIGHTi
Banks’ Unrealized Losses, Part 2: Comparing
to SVB
September 1, 2023
Part 1 of this two-part Insight discusses a new proposed rule that would require all banks with over $100
billion in assets to include unrecognized gains and losses on available for sale (AFS) debt securities (via
the inclusion of accumulated other comprehensive income [AOCI]) in capital. Part of the motivation for
the proposal is the role that unrealized capital losses played in the failure of Silicon Valley Bank (SVB) in
2023.
Under the Fed’s enhanced prudential regulatory (EPR) framework, SVB elected not to include AOCI in
common equity Tier 1 (CET1). Although SVB qualified as well-capitalized under capital rules in 2022, its
capital was rapidly depleted in the days before its failure when it sold securities that had fallen in value at
a loss to meet large and sudden deposit outflows. According to the Fed’s report on SVB’s failure, had
EPR requirements not been changed following P.L. 115-174, SVB would have become an Advanced
Approaches bank subject to AOCI requirements in the second quarter of 2020. Had SVB been subject to
this requirement (as an Advanced Approaches bank or under the new proposal), the Fed estimates that
SVB’s potential losses would have been reflected in its CET1 earlier, as its CET1 value would have fallen
by $1.9 billion (1.7 percentage points) at the end of 2022.
Comparing SVB to Other Large Banks Subject to the
Proposal
SVB had unrealized losses on its securities primarily because rising interest rates caused their value to
fall—an issue affecting all banks, as discussed in part 1. As Figure 1 illustrates, some banks subject to the
proposed rule had large unrealized AFS losses as a percentage of CET1 at the end of 2022, and some
banks would have come close to falling below the 6.5% CET1 ratio required to be well capitalized if
unrealized losses were subtracted from their CET1.
SVB was unusually vulnerable to unrealized losses, however. According to the Fed, SVB’s total securities
holdings as a share of total assets (55%) were more than double its peers. According to Federal Deposit
Insurance Corporation Vice Chair Travis Hill, SVB invested more than half of its assets in long-term
Congressional Research Service
https://crsreports.congress.gov
IN12232
CRS INSIGHT
Prepared for Members and
Committees of Congress
link to page 2
Congressional Research Service
2
Treasuries and Agency securities, of which 79% had a remaining maturity exceeding 10 years. The longer
the maturity of the bond, the more it will fall in value when interest rates rise.
Figure 1. CET1 Levels With and Without Unrealized Losses on AFS Securities
Banks Affected by Proposed Rule That Reported Data
Source: CRS calculations.
Notes: For reference, the dashed line shows the 6.5% well-capitalized category under prompt corrective action (PCA).
These calculations are not official for PCA purposes.
Notably, SVB did not stand out relative to its peers in Figure 1 in terms of low capital levels—with or
without unrealized AFS losses subtracted—in part because SVB classified most of its securities as held to
maturity (HTM). According to Hill, HTM securities accounted for 85% of SVB’s securities losses—“a
link to page 3
Congressional Research Service
3
percentage that may have been higher had the bank’s capital requirements incentivized such a shift.” One
study found that 10% of banks had larger unrealized losses (for AFS and HTM securities) than SVB, 10%
had less capital than SVB, and 1% had a higher share of uninsured deposits. Figure 2 illustrates that if
unrealized losses on HTM securities were included, SVB’s securities holdings and unrealized losses as a
percentage of assets were significantly higher than all other banks affected by the proposal.
Figure 2. AFS and HTM Securities Holdings and Unrealized Losses
Banks Affected by Proposed Rule That Reported Data
Source: CRS calculations.
Notes: For HTM securities, unrealized losses are proxied as the difference between amortized value and fair value.
Unrealized gains and losses on HTM securities are excluded from regulatory capital under the proposal,
however, as they are never likely to be realized (because banks do not intend to sell them). This creates an
opportunity for regulatory arbitrage if improper classification of securities is not adequately guarded
against. (Generally accepted accounting principles [GAAP] include restrictions against improper
classification.) The regulators report that banks that include AOCI in capital have a higher share of
securities classified as HTM, and one study found that banks shifted $900 billion in securities to HTM
during 2022, when rates were rising, allowing them to avoid $175 billion in losses. It also found that
banks were more likely to shift if they had lower capital, higher uninsured deposits, and more interest rate
risk. Another study found a 15% increase in likelihood that a bank would classify a security as HTM
when it was subject to AOCI. A third study found unintended consequences of including AOCI in capital,
such as increased borrowing, as banks cannot easily sell HTM securities when they need liquidity.
Would SVB have changed its behavior (or been forced by its creditors or regulators to change) sooner if
AOCI had been included in its regulatory capital? Although its capital would have been significantly
lower, it would still have remained well capitalized. One can speculate whether the regulatory capital hit
would have caused enough concern to spur changes, but information on its unrealized losses was publicly
Congressional Research Service
4
available. Banks report unrealized losses on securities in their quarterly call reports and in their public
filings, and AOCI is included in equity under GAAP. Yet SVB was neither downgraded by rating agencies
nor assigned a “sell” rating by the vast majority of equity analysts before its failure, according to the Fed.
Regulators could manage interest rate risk through supervision instead of capital requirements, but that
depends on effective supervision. Supervisors have long been alert to interest rate risk—a major cause of
the savings and loan crisis in the 1980s—and it has been highlighted repeatedly in recent years by the
Financial Stability Oversight Council and bank regulators. In that regard, SVB serves as a cautionary tale.
The Fed’s report notes that the Fed planned to downgrade SVB’s interest rate risk management to less
than satisfactory but failed to take action before SVB collapsed.
Author Information
Marc Labonte
Specialist in Macroeconomic Policy
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.
IN12232 · VERSION 1 · NEW