ABSTRACT
As central banks tighten their monetary policies, long-term assets, like sovereign bonds, may experience significant drops in their market values. While holding securities until maturity shields banks from direct capital losses resulting from increasing rates, the risk of materialization of unrealized losses from HTM portfolio may affect bank loan supply decisions. I find that banks with 1 pp higher share of unrealized losses in their risk-weighted assets charge on average 8 bps higher lending rates to corporates in Slovenia. These unrealized losses have a lower impact compared to actual changes in capital, for which the literature establishes the impact of around 10–25 bps.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 https://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-financial-instruments/IFRS 9 Financial instruments.
2 Banks approached the regulator with the request to reclassify certain assets from AFS to HTM, but their request was denied.
3 https://bankaslovenije.blob.core.windows.net/publication-files/mesecna_informacija_marec_23_en.pdfSee Monthly report on bank performance, march 2023.
4 I tested different cut-off dates for accounting losses (from November 2022 to February 2023) and the results are always very similar to the ones presented in the paper. All the estimate are available upon request.