Bank of America's unrealized losses on securities rose to $131.6 billion

Bank of America reported unrealized losses of $131.6 billion on securities in the third quarter, growing from the second quarter, but the bank does not expect the portfolio will generate actual losses in the long-term. Unrealized losses have come under closer scrutiny by investors since March. At the time, Silicon Valley Bank sold a portfolio of its holdings at a sharp loss, precipitating its collapse and fueling the worst industry turmoil since the 2008 financial crisis.

Analysts say it is highly unlikely that Bank of America would sell the securities at a loss because the lender has strong liquidity with consumer deposits and higher capital. Keeping securities until maturity also gives it the flexibility to avert mark-to-market losses. Banks use the held-to-maturity designation to buy less risky securities that give them downside protection, even though in a rising interest rate environment there is limited upside potential. "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."

Bank of America had reported early $106 billion in paper losses in the second quarter.

Bank of America, the second-biggest U.S. lender had about $603 billion in held-to-maturity securities, it said in a filing on Tuesday, shrinking from $614 billion in the second quarter.

And yet the holdings of low-yielding assets have also constrained the second-largest U.S. lender's ability to make higher profit from deploying its cash in money markets or other assets with greater returns, analysts have said.

"The bank has one of the lower overall yields on its securities book, and that securities book is there to stay for a while," said Eric Compton, analyst at Morningstar.

U.S. banks could be grappling with at least $650 billion of unrealized losses in their securities portfolios, according to an estimate from Moody's after prospects of interest rates staying higher for longer led to a bond market rout in the third quarter.

That would be 15 more than the $558 billion of losses they were sitting on at the end of the second quarter.

JPMorgan Chase had unrealized losses of $40 billion in its HTM portfolio in the third quarter.

Citigroup did not disclose paper losses on its portfolio for the third quarter. They stood at $24 billion at the end of the second quarter. Both banks did not comment beyond the disclosures.

While the securities holdings represent an economic drag, the mounting unrealized losses are a "non-issue" from an accounting perspective, said Allison Nicoletti, a professor at the Wharton School at the University of Pennsylvania. "If you would have waited, you would have gotten a higher yield on the bonds,” she said. Still, "these are paper losses — this is a problem only if you have to sell them." When banks take in customer deposits, they can choose to put excess money to work by buying bonds that they keep for sale based on market prices. Or they can lock in rates for securities that are held until they mature.