Part 4/9:
The core issue stems from aggressive interest rate hikes by the Federal Reserve. Banks initially purchased bonds when rates were low, but as the Fed increased rates, the value of these securities declined. Whether held to maturity or available for sale, the market value of these assets has fallen, turning paper gains into unrealized losses.
While banks can, in theory, wait until securities mature to avoid realizing these losses, many cannot afford to do so. Liquidity needs—especially during economic downturns or if a bank faces a credit event—force them to sell devalued assets at a loss, thus transforming paper losses into actual losses that hurt their bottom line.