U.S. banks collectively reported approximately US$395.3 billion in unrealized losses on their investment-securities portfolios as of the second quarter of 2025, the Federal Deposit Insurance Corporation (FDIC) disclosed in its latest banking-sector profile. While this figure represents a modest decline of roughly US$17.9 billion (4.3 %) from the previous quarter, analysts warn the level remains a key vulnerability for the banking sector particularly if interest-rate pressure or liquidity strains intensify.
Unrealized losses refer to mark-to-market losses on securities that are still held and not sold. These losses do not reduce bank capital if the securities are classified as Held-To-Maturity (HTM), but they can become realized losses if banks are forced to sell. The magnitude of $395 billion has drawn investor attention to how well banks are managing the interest-rate and duration risk in their asset portfolios.
Why These Unrealized Losses Matter
In a rising-rate environment, the value of fixed-rate securities such as long-term Treasuries and mortgage-backed securities falls. Banks that accumulated large holdings during the low-rate period now face paper losses. According to the St. Louis Fed, the ratio of unrealized losses to total securities held by U.S. banks fell to 6.8 % in Q2 down from a peak of 12.2 % in 2023.
Still, the sheer size of the exposure remains material. If deposit outflows or credit-quality events force banks to realise losses or mark them to market, the risk of capital strain or liquidity stress could rise. Smaller community banks, in particular, are viewed as more vulnerable because they tend to hold a higher share of long-duration securities and have thinner capital buffers.
The FDIC’s report also notes that the industry’s share of longer-term loans and securities as a percentage of total assets has fallen to 34.1 % as of Q2 from its peak. The decline suggests banks are reducing exposure to rate-sensitive assets, but the unrealized-loss burden reflects earlier accumulation decisions.
How Banks Are Responding
Banking institutions are responding by reinvesting maturing securities into shorter-duration instruments, reducing interest-rate and liquidity risk. According to the data, much of the decline in unrealized losses during Q2 came from securities rolling off balance sheets rather than large mark-ups in value.
Furthermore, banks emphasise that many of the securities are intended to be held to maturity, meaning the losses remain on paper unless sold. Nevertheless, rising rates and changing macro conditions mean that the unrealised losses remain a latent risk especially if funding stress or deposit outflows force action.
What Investors Should Watch
Investors and analysts will closely monitor:
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the trend of unrealized losses in future FDIC reports;
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levels of deposit outflows and whether banks need to liquidate securities;
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changes in the yield curve and whether rates continue to rise despite expectations of cuts;
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bank capital-adequacy metrics and whether latent losses translate into realised losses or weaker earnings.
Any surprise increase in realised losses or liquidity stress among smaller banks could trigger broader sector-wide confidence concerns.
FAQs
Q1: What does it mean for a bank to have “unrealized losses”?
A1: Unrealized losses occur when the market value of securities falls below purchase price but the bank retains the asset and does not sell it, so the loss remains “on paper”.
Q2: Why are banks experiencing large unrealized losses now?
A2: Primarily because rising interest rates over recent years reduce the market value of fixed-rate securities, e.g., long-term Treasuries or mortgage-backed securities.
Q3: Does the $395 billion in losses mean banks are insolvent?
A3: Not necessarily. Many securities are classified as Held-To-Maturity, so the losses are not realised unless sold. However, they remain a potential risk if banks face liquidity or funding stress.
Q4: Which banks are most exposed to these losses?
A4: Smaller and regional banks that hold significant long-duration securities and have thinner capital buffers tend to have greater vulnerability.
Q5: How can these unrealized losses affect the economy?
A5: If losses are realized, banks may reduce lending or raise capital, which could slow credit growth and economic activity. Liquidity shocks might also raise systemic concerns.
Q6: What should investors monitor regarding this issue?
A6: Key indicators include subsequent FDIC unrealized-loss data, bank‐specific disclosures of securities holdings, deposit trends, earnings releases, and regulatory commentary.