Increased Interest Rates Spike Questions from Banks on Regulatory Capital

Considerations for the Rising Rate Environment and Your Investment Portfolio

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On March 16, 2022, the Federal Reserve increased interest rates for the first time since 2018, and we are anticipating this to continue throughout 2022. As a result, we are starting to get questions about the impact as banks are starting to see unrealized losses on their available-for-sale (AFS) securities.

What does it truly mean to have these losses?

It’s important to remember that while these losses impact balance sheet capital, in most cases it does not impact regulatory capital.


As part of Basel III, most banks made a one-time election to opt out of including unrealized gain/losses (URGL) when calculating their capital ratios. While you should monitor these losses, in most cases it has no actual impact on “capital”.


KCoe has had banks ask about reclassifying from AFS to held to maturity (HTM). “As you consider this, it’s important to remember that once you transfer to HTM, you lose the ability to sell the security,” cautions Sandy Sporleder, banking advisor at KCoe Isom.

“While you may not need that liquidity today, that may not be the case in the future. If you do make the transition, your current unrealized gain/loss will need to be accounted for by amortizing/accreting the unrealized gain/loss over the life of the security.”

The deferred taxes related to this security will also need to be considered. In addition, considerations should be made if you need a reserve for the HTM securities, as required by the CECL methodology.


Regulatory capital is complicated, and it’s important that your board understands the difference between balance sheet capital and regulatory capital as it makes decisions.


Contact a KCoe banking advisors with questions regarding your unique scenario.

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