Revenge of the S&Ls: How Banks Lost a Half Trillion Dollars During 2022

Abstract

At year-end 2022, U.S. banks reported $620 billion in unrealized losses on their investment securities portfolios as the Federal Reserve Board raised its target interest rate by 400 basis points to combat inflation. In many ways, these losses are strikingly similar to the losses on residential mortgages experienced by savings & loans in the late 1970s and early 1980s when the Federal Reserve Board’s Federal Open Market Committee (FOMC) raised interest rates to combat inflation—despite the regulatory reforms that were put into place after that crisis. In this study, we analyze the role of investments by banks in different types of investment securities (including Treasury bonds, municipal bonds, residential mortgage-backed securities (RMBS), and commercial mortgage-backed securities (CMBS)) in explaining these losses. We show that banks used RMBS to “reach for yield” during 2020–2021 with funds from the massive deposit inflows associated with pandemic relief. Finally, we find that the equities market for publicly traded bank holding companies failed to price these losses.