Bank Fragility and Reclassification of Securities into HTM

Abstract

Held-to-Maturity (HTM) accounting allows banks to avoid using current market prices to value securities on their balance sheet. During 2022, the HTM portfolios of U.S. banks grew from $2 trillion to $2.75 trillion while their overall holdings of securities remained constant at $6 trillion. U.S. banks collectively transferred at least $.45 trillion to their HTM portfolios simply by relabeling securities that they already had on their portfolios. Accounting rules determine that banks must have not only the intent but also the ability to hold securities to maturity when using HTM accounting. I find that banks with lower capital ratios, higher share of run-prone uninsured depositors, and whose portfolios were more exposed to interest rate risk were more likely to reclassify securities to HTM during 2021 and 2022.

Keywords: Held-to-Maturity accounting, Accounting rules, Interest rate risk, Liquidity Risk

JEL Classification: G21, G28, M41, G32, E43