NEW YORK, October 31, 2026 – The balance sheet of a bank may appear totally fine in its quarterly statements but could actually be hiding a problem which will cost the bank dearly. This is the harsh reality of unrealized losses, where the securities purchased in an era of record-low interest rates are now worth less, despite not being realized yet. The latest analysis from Fitch Ratings indicates that U.S. banks are better prepared for future interest rate increases than they were in 2022-2023.
Better prepared, yes. Bulletproof? Not quite.
The difference begins with the starting point. As we entered 2020, the federal funds rate target range was 0% to 0.25%, and the 10-year Treasury yield was around 1.5%. Now, after the recent 25-basis-point increase, the federal funds rate target range stands at 3.75% to 4%, while the 10-year Treasury yield was 5% on October 27. Banks do not have to scale the same mountain from ground level; they are halfway up already.
Why this time feels different
Here’s the encouraging part. Many organizations have reduced the duration of their securities portfolios, invested maturing securities into high-yielding ones, and taken other interest rate risk management steps. According to Fitch, this has made many banks less sensitive, leading to an improvement in the performance of the portfolio and lowering the percentage of securities purchased in the zero-rate environment.
Regional banks have changed their practices after the March 2023 failures. The example of Truist Financial, KeyCorp, and Banc of California is provided by Fitch as regional banks that have shortened their portfolio duration and lowered convexity risk by moving away from mortgage-backed securities and towards U.S. Treasuries. This is not glamorous business. It’s like putting your roof together before the storm comes.
And yet, the storm has not passed.
The $327 billion question
Unrealized losses continue to be the industry’s troublesome legacy. For the U.S. banking system as a whole, total unrealized securities losses from available-for-sale and held-to-maturity portfolios amounted to approximately $327 billion as of June 30, 2026—equivalent to around 12% of total bank equity. This is a big improvement compared to the peak level of 28% reached at the end of 2022, but it remains a huge figure nonetheless.
What matters is that not all banks have the same exposure to such losses. Duration-heavy banks, minimal hedge banks, or banks facing losses large in relation to tangible equity are the most vulnerable. If Treasury yields continue to rise on the long end, these unrealized losses will become even bigger.
So what should regulators do? The U.S. Basel III proposals for March 2026 might make it necessary for Category II-IV banking organizations to consider accumulated other comprehensive income, including unrealized gains and losses in available-for-sale securities, as part of regulatory capital. While the supporters would term it overdue, the critics would call it a case of being procyclical – making banks realize losses during stressful market conditions. Both these views hold some water, which explains why there won’t be an easy resolution.
Deposits: The other pressure point
Not only do higher rates wound bond investments. Higher interest rates are a strong incentive for deposits as well. Funds that previously remained in non-interest-bearing and low-yield accounts may move to money market accounts and time deposits. That increases the cost of funding and narrows margins. Banks are expected to take steps to prevent losses, but the result would hinge on deposit betas, asset repricing, competition, and the yield curve.
And the latter issue is far from minor. A bank’s resilience is not only the issue of its assets but of its ability to retain customers if a more attractive yield is just one tap away on a smartphone app. Deposits are notoriously hard to forecast, and Fitch itself warns that disclosures differ significantly in their assumptions regarding deposit run-off, prepayments, and asset repricing. Bank comparisons through such disclosures, to be honest, are like comparisons of weather predictions from different measuring devices.
A more resilient system, not a risk-free one
My view is straightforward: The financial system deserves credit for its learning ability. The shorter tenor, improved reinvestment return potential, and improved balance sheet management make a replay of the ugly 2022-2023 dynamics unlikely. The Fitch conclusion regarding their better position stands on sound reasoning, and the facts back up the assertion.
However, resilience does not mean invulnerability. Nearly $327 billion of accumulated unrealized losses, a 5 percent Treasury rate, and increasing funding cost pressures are real limitations—no hypotheticals here. The banks that are the most vulnerable are those that believe a good starting condition translates into an end of risk management practices.
More rate increases can take place. There can be outflows of deposits. There can be an additional increase in the 10-year yield. Those organizations that will navigate through this difficult period in comfort are those that view this not as a resolved crisis, but as an ongoing one.
