EBA publishes findings of ad-hoc analysis on banks bonds’ holdings

EBA released findings from an ad-hoc analysis regarding unrealized losses on debt securities held at amortized cost within EU banks. This analysis was conducted as part of ongoing risk monitoring efforts in collaboration with CAs. The study aimed to understand the potential evolution of unrealized losses on EU banks‘ debt securities held at amortized cost.
Key points from the analysis include:
– Debt securities (Bonds): The analysis focused on debt securities (bonds) held at amortized cost by EU banks. These bonds are held with an accounting classification that allows banks to hold them without marking them to market. The analysis considered the potential downside risk if banks were to liquidate these bond holdings, realizing the unrealized losses.
– Evolution of Unrealized Losses: As of February 2023, the total amount of debt securities held at amortized cost by banks was 1.3 trillion EUR. The associated unrealized losses, net of hedge adjustments, amounted to 75 billion EUR, indicating an increase since the end of 2021 due to rising interest rates. Gross unrealized losses were mitigated by hedges, amounting to 38 billion EUR.
– Adverse Scenario: The analysis also considered an adverse scenario similar to the one used in the 2023 EU-wide stress test. Applying this scenario, additional unrealized losses on amortized cost bond holdings, net of hedges, were estimated at 133 billion EUR for banks in the sample. Hedges reduced gross losses by 23%.
– Risk Drivers: The primary driver of unrealized losses under the adverse scenario was credit spread shocks, reflecting banks‘ reliance on micro hedges for interest rate risk.
– Overall Impact: The study concluded that unrealized losses on bond holdings in the EU banking sector were currently limited compared to the overall solvency and liquidity profile of the banks. The analysis provided insights into potential risk exposures and the importance of risk-mitigating factors.
– Interest Rate Risk Management: The study emphasized that the hypothetical gains and losses should be assessed in the context of overall interest rate risk management. It referred to EBA Guidelines on IRRBB and CSRBB (eventid=18009) as frameworks for evaluating interest rate risk.
– Data Disclosure: Individual bank information on the carrying amount and fair value of debt securities held at amortized cost was disclosed for December 2022 and February 2023.
The analysis aimed to provide a snapshot of potential risks related to unrealized losses on bond holdings and highlight the importance of risk management practices in the EU banking sector. It is worth noting that this analysis was not part of the EU-wide stress test and had its specific scope and limitations.