The idea that the banks won't buy 30-year securities anymore, just because now they are compelled to record the unrealized loss on Equity (AOCI line item), like anyone else does, is insane.
There have been two problems with the U.S. banks that are interrelated: Wrong loss on Assets and a hidden capital hole.
-Liquidity crisis: debt securities in Held-To-Maturity portfolios, valued at amortized cost with a small write-down, just like a loan. It's only allowed either a loss on fair value (volatility in earnings) or a loss on AOCI (directly on Equity). Thus, there are two categories, not three as the Federal Reserve claims on a Schedule on how to fill out a Balance Sheet.
-The hidden hole in Equity that has popped up in 2023. The accumulated losses on debt securities mentioned before, should have been funded the last years (asset sales, issuance of stocks, Prompt Corrective Actions like dividends and stock buybacks suspended). The problem has been FDIC rulemaking that authorized them an AOCI opt-out election, when calculating the CET1 = Retained Earnings + AOCI (accumulated unrealized losses) + common stock par value - Treasury Stock (buybacks) + APIC.
CET1 = CE + regulatory adjustments.
The FDIC has some explaining to do.
BOTTOM LINE
The key: all of the above is related to a bank that is not "an advanced approaches FDIC-supervised institution", that may make a one-time election to opt out of recording AOCI.
That is, for banking organizations with assets between $100B and $700B (Categories III and IV)
This will change with the proposed changes in the capital requirements, now in place with a comment period: "Basel III framework endgame".
There won't be opt-out election. Those banks will be required to include the full AOCI on the CET1, phased in during a 3-year transition period, beginning in July 1, 2025.
This is about a flawed rulemaking (AOCI opt-out election) for the regional banks and Medium- and Small-sized banks, but unrelated to the large banks (Category II and GSIBs) that simply broke the rules (Trump's famous deregulation rhetoric), because they didn't have this election.
So, the large banks will have higher capital requirements as well, but it's because they are catching up with the compliance with the rules they broke.
Rogue bankers, as seen in the latest earnings report of JPM, want to pass the new proposal Basel framework endgame, off as a brand new rulemaking with a transition period for GSIBs beginning in 2025, when they were already subject to these requirements.
Deregulation, break the laws, external position (off-Balance Sheet; off-Federal Budget),.... The Age of Plunder.
DISCLAIMER: It's my understanding after reading the proposed Basel III endgame.
