Written by Bryan Lutz, Editor at Dollarcollapse.com:
Banks are quite different entities than your average mom and pop shop still running off cost accounting. They count their inventory, costs, sales and behold, that’s a full day’s work. The balance sheet is also straight forward, you have your inventory, your building, and maybe a forklift or two to move pallets. A bank’s balance sheet will be different.
For example, the Bank of America(BoA) holds securities under the line items available-for-sale (AFS) or held-to-maturity on their balance sheet. While the BoA brought in a reported $8.2 Billion in profits this quarter, those AFS and held-to-maturity securities tell a different story on the balance sheet. The bank also reported a whopping $131.6 Billion in unrealized losses. So almost another $20 billion in losses from their second quarter report. Losses coming from US Treasury bonds, and mortgages.
Reuters reports the unyielding confidence of the bank:
“All of these are unrealized losses are on government- guaranteed securities,” Bank of America’s chief financial officer, Alastair Borthwick, told reporters on conference call discussing third-quarter earnings. “Because we’re holding them to maturity, we will anticipate that we’ll have zero losses over time.”
It’s the slow reduction of the bank’s liquidity that’s at risk here. If the bank were to experience some sudden loss from equity investments, or over time from interest payments, then it may have to sell treasury bonds at a loss. You can see the bank’s ability to generate revenue slowing down through loans and leases.
Where the Bank of America’s Money is Going…
In Spring 2022, the Fed started its quantitative tightening cycle to real in the money supply and keep inflation from rising. So, the Bank of America is preparing for what they can anticipate, which is paying more for higher interest rates. So we see more provision for higher interest rates below.
What the Headlines Really Mean…
Yesterday, we saw mostly positive headlines regarding America’s second-largest bank. The headlines mostly pointed towards profits, income, and positive side of higher interest rates.
Yes, interest income from higher interest rates. When you pay “prime” plus interest on your mortgage, “prime” is what your bank must pay for that money.
High-trading volume can often indicate that traders anticipate clear movements for a stock. And that means traders anticipated movements in one direction or the other. You tell me. BoA’s 2-year chart is below:
What we see here is a long-term bear market and cyclical decline. Since the Fed started QT, the BoA’s value has declined YoY. It will most likely continue to decline even as their CEO affirms the Fed’s mathematics. The Keynesian theory is that when interest rates are raised, consumer spending and employment will both go down. So in the grand scheme of things, that is to be expected. But not when it comes to the bank’s ability to make money.
If rates continue banks will have less money to lend in consumer and global markets. I suspect we will see a cycle of decline as the numbers are showing above: losses as a result of raising interest rates, slight recovery, and the more declining losses. As the Fed, considers what to do with inflation, and continues to stay higher for longer, we will most likely see profits continue to gradually decrease until loan payments become the banks own concern. If the BoA has to start paying for their loans without enough revenue, what will they have to sell?
Cheap US Treasury bonds may be the answer. And then the losses become realized…