But the US “Held to Maturity” accounting classification for certain debt securities portfolios is an impediment to their use as a source of liquidity other than in exceptional circumstance; and to treating them as High-Quality Liquid Assets under the Basel standard.
A bit of history first
It is just over two years since Silicon Valley Bank (SVB) failed following a rapid bank run. One feature of its failure was the significant holding of debt securities classed as Held to Maturity (HTM) under US accounting rules (2022 year-end: $91bn). These securities were mainly holdings of US agency mortgage-backed securities and were considered to have very low credit risk. Less than $1bn was corporate debt and that was not rated worse than A3. As such it would be assumed the portfolio would be a good source of liquidity.
The motivation for carrying at amortised cost is to avoid recognising short term profit volatility in the financial statements from a portfolio that will provide a consistent income stream over time.
But there were solvency issues!
The HTM securities were carried at amortised cost, meaning the bank did not need to recognise fair value gains and losses within its profit and loss account or within its equity position. The bank also had $26bn of Available for Sale (AFS) securities, and while these were measured at fair value, the gain or loss was reported in other comprehensive income rather than the income statement.
As interest rates rose rapidly over 2022, the fair value of the securities declined and SVB had significant unrealised losses ($15bn) within its HTM portfolio (and also within its AFS securities portfolio) by the beginning of 2023.
The unrealised losses were seen as indicative of a solvency issue which was part of the trigger for the bank run in early 2023. The concern was that SVB faced either reduced margins and lower profitability given the duration mismatch between its long-term securities and its shorter-term deposits; or realising significant losses if it was forced to dispose of its HTM / AFS securities portfolios .
As the bank started losing deposits in early 2023, $21bn of AFS securities were sold crystallising $1.8bn of losses in the income statement. Within two days, however, the bank had failed as actual and projected withdrawals totalled $140bn: representing just under 70% of its 2022 year-end asset position, and which the bank could not meet.
SVB’s HTM portfolio was not sold. It was not capable of providing the necessary liquidity, as the severity of the deposit run meant the potential outflows were just too large. However, even had the HTM portfolio been sufficiently large to generate enough funds to pay depositors, the crystalised losses on the HTM portfolio would have wiped out the bank’s equity . The bank was finished either way.
Unrealised loss on HTM portfolios remain an issue
While SVB might have been an outlier, at the end of Q1 2025 US FDIC insured banks had unrealised losses of $413bn within their HTM and AFS securities portfolios, split roughly 50:50. While the fall in rates in late 2024 helped reduce the size of the potential loss, there is the potential for long-term rates to have risen in the second quarter of 2025 worsening the potential unrealised losses.
Can HMT portfolios be a source of liquidity
To be classed as HTM a bank has to have both the intent and the ability to hold the debt securities to maturity. The Federal Accounting Standards Board’s (FASB) standard is explicit: “A debt security that is available to be sold in response to changes in market interest rates, [...], the entity's need for liquidity, [...] shall not be included in the held-to-maturity category because the possibility of a sale is indicative that the entity does not have a positive intent and ability to hold the security to maturity.” This obviously means it is not possible to use HTM portfolios to meet liquidity needs.
Furthermore, when interest rates have risen there is the potential for the fair value (or economic value) of a HTM portfolio to be less than its carrying value. This is a further impediment to using the assets for liquidity purposes as management are not incentivised to dispose of the assets to avoid recognising the loss.
The HTM classification does not stop a bank selling the securities, but if it does then, subject to certain exceptions, the whole portfolio is tainted and is required to be reclassified as AFS and fair valued. The exceptions that may permit a sale while retaining the HTM classification are set out in the FASB standard , but in general they are a change in the external circumstances surrounding the debt security (e.g. a change in tax law; a change in risk weights for regulatory capital purposes) and that are not specific to an individual bank. So, for example, a regulator directing an individual bank to sell a portfolio would not be an exception, but a direction affecting all banks might be.
Separately a sale may be allowed when there is an event that is isolated, non-recurring, unusual and that has not been reasonably anticipated. The FASB standard recognises that these events are most likely to be remote disaster scenarios, such as a bank run.
HTM portfolios are therefore incapable of meeting routine liquidity needs, if a bank wants to maintain the HTM classification. They may however be used to meet extreme liquidity needs. The irony is that this may be irrelevant when the portfolio has significant unrealised losses: as crystallising the losses may be the final nail in the coffin.
Obviously if a bank is happy to reclassify its HTM securities as AFS, then the portfolio may be a source of liquidity. How good a source of liquidity then depends upon the quality of the assets.
HTM portfolios and High Quality Liquid Assets
Under the Basel Liquidity Coverage Ratio (LCR) a bank must hold a stock of High Quality Liquid Assets (HQLA): that is a stock of unencumbered assets to cover the net cash flow outflows over a 30-day period under a prescribed stress scenario.
The Basel standard sets out the fundamental characteristics that HQLA should possess and prescribes the types of asset that may meet the characteristics. A key feature is that their “liquidity-generating capacity … remain intact even in periods of severe idiosyncratic and market stress”. There are two types of asset: firstly Level 1 assets are those with no perceived credit risk, a stable value and deep markets. For example, cash, central bank reserves, government and public sector securities. Level 2 assets are similar but have a higher, albeit still low credit risk, and include sovereigns risk weighted at 20%, highly rated corporate debt and residential Mortgage-Backed Securities (MBS ). Level 2 assets are subject to haircuts and limits on their inclusion.
There are four fundamental characteristics that set out (i) the inherent characteristics of the security (e.g. low risk; certain valuation; low sensitivity to market risk); (ii) what a sufficient market is (e.g. active; sizable; low price volatility); (iii) the bank’s operational arrangements to ensure assets can be used for liquidity purposes (e.g. assets must not encumbered, for example given as security for loan); and (iv) that the stock of HQLA should be well diversified (except for home country sovereign debt and cash).
Firstly, these is no reason why the assets in an HTM portfolio need not be Level 1 or 2 assets; or satisfy the fundamental characteristics. The majority of SVB’s assets were US agency debt with very low credit risk. An assessment would, however, need to made whether individual assets and the portfolio overall meets the Basel standard. So for example, SVB had a concentration of US agency MBS.
There is no explicit constraint on HTM portfolios being treated as HQLA by virtue of being carried at fair value in the financial statements and there being unrealised accounting losses . The relevant HQLA measure of available liquidity is the fair value regardless of whether it is the carrying value in the financial statements. To the extent the fair value of the assets falls a bank would need to replenish its stock of HQLA.
The main issue with HTM portfolios is that they are likely to fail the operational requirements that HQLA must satisfy. The intent and ability to hold to maturity, and restrictions on disposals to maintain the accounting HTM treatment, mean the securities are not being managed to provide a source of liquidity. Specifically, the accounting requirements would preclude the Basel operational requirement to periodically monetise (ie sell or dispose of) a proportion of the assets by way of testing bank’s operational capability . It is also possible the assets may not be under the control of the function that manages liquidity (another Basel requirement).
HTM portfolios might not qualify as HQLA for the purpose of any regulatory measure of liquidity. That does not however mean that they cannot be used as a pool of liquidity, either leading to a reclassification to AFS or restricted to periods of extreme stress.
