As Interest Rates Rose, Banks Did a Balance-Sheet Switcheroo Lenders pledged to hold on to money-losing bonds, allowing them to avoid reporting losses

The six banks were able to flatter their balance sheets with a flick of the accounting ledger. Banks can hold assets as “available for sale,” which means they are valued using market prices. Another option is to call them “held to maturity,” meaning they won’t be sold. These bonds are held at the banks’ cost. The logic is that daily market prices aren’t relevant to assets that banks wouldn’t sell.

The banks’ held-to-maturity bonds had a combined $1.14 trillion balance-sheet value as of Dec. 31, up from $681 billion a year earlier. The increase was mainly due to the reclassifications.

 The six banks’ reclassifications were part of an industrywide shift last year as bond prices fell. About 48% of securities held by U.S. banks were classified as held-to-maturity at the end of 2022, up from 34% a year earlier, according to Federal Deposit Insurance Corp. data. Unrealized losses on securities were $620 billion, of which $341 billion were on bonds dubbed held-to-maturity. The six banks’ unrealized losses on held-to-maturity securities accounted for 35% of the industry total.

The biggest such reclassification was by Charles Schwab, which is structured as a savings and loan holding company and regulated by the Fed. It transferred $188.6 billion of securities to the held-to-maturity category from available-for-sale. Schwab wasn’t labeling any of its bonds as held-to-maturity at the end of 2021.

PNC transferred $82.7 billion of bonds to held-to-maturity from available-for-sale. JPMorgan Chase JPM 0.33%increase; green up pointing triangle & Co. transferred $78.3 billion. Truist Financial Corp., TFC 2.24%increase; green up pointing triangle Wells Fargo WFC 1.17%increase; green up pointing triangle & Co. and U.S. Bancorp USB 0.91%increase; green up pointing triangle transferred $59.4 billion, $50.1 billion and $45.1 billion, respectively.

“This is an artificial accounting construct, not an economic measure of the value of the assets,” said Sandy Peters, head of financial reporting policy for the CFA Institute, which certifies chartered financial analysts. “The value of a bond doesn’t change based upon how management decides to classify it. It’s worth what it’s worth.”

https://www.wsj.com/articles/as-interest-rates-rose-banks-did-a-balance-sheet-switcheroo-8e71336f?mod=hp_lead_pos2