Overall amount of unrealised losses in euro area banks’ bond portfolios contained

The ECB and EBA jointly conducted a data collection exercise, revealing that euro area banks supervised by the ECB reported net unrealised losses of approximately €73 billion in their bond portfolios held at amortised cost in February 2023.
This amount was considered contained. The exercise covered both bonds held at amortised cost and at fair value through other comprehensive income, and it included information on carrying and fair-value amounts of these portfolios. The net unrealised losses are the difference between the carrying amount and fair value of debt securities at a given date, and they also encompass adjustments stemming from hedges.
The significant institutions directly supervised by the ECB experienced rising interest rates, leading to increased gross unrealised losses, which peaked at €124 billion in December 2022 and stood at €116 billion in February 2023. However, the use of micro fair value hedges helped partially offset these losses, resulting in net unrealised losses of about €40 billion below the gross unrealised losses.
The main driver of the impact on unrealised losses was the sensitivity to widening sovereign credit spreads, which are predominantly unhedged, resulting in a smaller offsetting effect. The reported scenario-based unrealised losses should not be linked with EU-wide solvency stress test results, as they use different methodologies.
The quantification of unrealised losses should be considered in the broader context of banks‘ business models and funding strategies. Banks are expected to hold bonds in the amortised cost portfolio until maturity to reduce sensitivity to changes in interest rates and credit spreads. Therefore, the quantification of unrealised losses should be interpreted in a wider context that considers banks‘ balance sheet conditions from a holistic perspective.
This exercise and its results are not part of the EBA/SSM EU-wide stress test and cannot be used alone to assess the liquidity or solvency situation of a given bank. Unrealised losses can be gauged by comparing the carrying amounts and fair values of bond portfolios at a given date, but they provide only a partial assessment of a bank’s economic value of equity, which can be complemented with Pillar 3 disclosures to evaluate overall exposure to interest rate risk.
Of note, The ECB published selected bank-specific data points from this exercise as an XLSX-file.