The Debate Surrounding Bank Held-to-Maturity Rules

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Last year’s bank failures sparked heated discussions about risks and the steps banks need to take to mitigate them. One of the most contentious points of debate was Held-to-Maturity [HTM] accounting rules and whether they contributed to the financial turmoil.

HTM security rules have been debated several times in the past, but regulators have yet to find a solution that suits all parties. Where you stand on this issue can influence how you invest your company’s cash, so it is important to understand all the facts.

A Refresher on Held-to-Maturity Accounting Practices

As opposed to Available-for-Sale [AFS], HTM securities are investments – e.g. bonds – that a bank intends to hold for their entire term. These securities are valued on the balance sheet at their original cost and final value. Price fluctuations throughout the life of the investment essentially do not matter, so long as the bank holds them until maturity. However, issues arise if the bank gets into a situation where they need to sell these securities early.

As interest rates have risen over the past two years, the value of existing bonds on the secondary market has fallen dramatically. In turn, many banks have significant unrealized losses on both HTM and AFS securities, but HTM losses are not readily apparent on bank balance sheets. Current accounting rules allow these losses to be somewhat obscured in the footnotes of financial reports, and that is one key driver of this debate.

Did Held-to-Maturity accounting practices contribute to the banking turmoil in 2023?

Some critics argue that HTM accounting rules contributed to banking turmoil last year by causing banks to appear healthier than they were. In turn, the appearance of health led banks to mismanage interest rate risk – a catalyst in all three major bank failures in 2023.

HTM Securities at Silicon Valley Bank

In the case of Silicon Valley Bank [SVB], 78% of securities on their balance sheet were classified as HTM. When the bank experienced cash flow issues, the HTM securities couldn’t be sold without realizing significant losses.

Due to the classification of such a large proportion of investments as HTM, the degree of the bank’s financial troubles wasn’t immediately apparent to the average depositor. In fact, their struggles weren’t recognized by many of their clients until the days leading into the bank’s collapse.

Banks Used HTM Accounting Rules to Appear Healthier

After the failure of SVB, experts across the nation began studying other banks to determine if they were in similar trouble. They found that HTM securities not only made banks appear healthier, but that some banks had actively taken advantage of the HTM classification to make their financial statements appear stronger than they should be.

A study from the Federal Reserve Bank of Kansas City found that banks “were able to minimize the most concerning balance sheet effects of rising rates by classifying sizable portions of securities purchased during the pandemic as held-to-maturity.” The study goes on to say that “these accounting practices allowed banks to largely ignore the extent of interest rate risk they had incurred.”

Weaker Banks Were More Likely to Reclassify Securities as HTM

João Granja of the University of Chicago published a study showing that HTM securities at U.S. banks grew from $2 to $2.75 trillion in 2022 while their total securities remained constant at $6 trillion.1 The study also uncovered that the banks most likely to reclassify securities as HTM had lower capital ratios, a higher share of uninsured depositors, and more exposure to interest rate risk.1

Granja said that his findings “suggest that banks actively sought to insulate their balance sheets and statements of income from declining market prices.” In light of these findings, many industry experts renewed their criticism of HTM rules and reignited the debate around whether banks should be allowed to use the classification to bolster their financial statements.

Two Competing Views of Bank Held-to-Maturity Rules

On one hand, some people argue that the HTM classification should be eliminated. Their position is that all bank assets should be listed at their current value, or “marked to market.” Proponents of this change claim that it would make it easier for depositors and investors to determine the health of a bank.

On the other hand, supporters of HTM practices argue that “mark to market” would result in unnecessary volatility in bank financial statements that could make them more difficult to understand. They also contend that information about unrealized losses from HTM securities is available on bank balance sheets – for those who know where to look.

The Financial Accounting Standards Board [FASB] is among the latter group and chose not to consider changes to the HTM rules in December. FASB board member Susan Cooper told the Wall Street Journal, “I don’t think there’s a problem to solve.” Another board member, Fred Cannon, told the Journal that eliminating HTM classifications could pose unintended consequences like raising costs and complexities for banks as well as leading to distortions in the purchases of securities.

Are Held-to-Maturity securities the issue, or is mismanagement to blame for banking turmoil?

On both sides of the debate, many people argue that HTM accounting practices are not the crux of the problem, but bank risk management – or mismanagement. This view is supported by evidence as well.

A research paper co-authored by Amit Seru, professor of finance at Stanford Graduate School of Business and a senior fellow at the Stanford Institute for Economic Policy Research found that 11% of banks had worse unrealized losses than SVB at the time the bank failed. Seru said, “if SVB failed because of losses alone, more than 500 other banks should also have failed” suggesting that management of unrealized losses is even more important than the losses themselves.

The debate surrounding HTM rules is not new. In fact, it has been rekindled surrounding each major episode of banking turmoil in the past three decades. Therefore, it is likely to continue being a topic of discussion between banking leaders and economists until a resolution that suits both parties can be found. In the meantime, corporate cash managers face the challenge of ensuring that their cash is safe at banks with significant HTM securities.

How can businesses keep cash safe at banks with significant Held-to-Maturity securities?

To keep your company’s cash safe, you could review the footnotes of each bank holding your cash and manually review the risk associated with the bank. However, this process is tedious and – as Professor Seru’s research showed – there is no guarantee that a large share of HTM securities provides meaningful insights into the bank’s safety.

A simpler and more effective approach is to ensure all your company’s cash is secured by the ultimate protection – FDIC or NCUA insurance. These government agencies are backed by the full faith and credit of the U.S. government and guarantee that your cash is safe in the event of bank failure, but only up to the $250k limit. Fortunately, there is a solution to achieve full protection for all your cash.

Earn More, Risk Less® With Extended Government Insurance From ADM

Our company, the American Deposit Management Co. [ADM], offers business cash solutions that provide access to full government insurance from the FDIC or NCUA. We do this by spreading your cash across our nationwide network of financial institutions so your balance is under the limit at each bank – meaning every penny is covered by government insurance.

In addition to added safety, we also offer access to nationally competitive yields and a variety of liquidity options. Best of all, we accomplish all of this with one account and one consolidated monthly statement – making reconciliations a breeze.

Contact a member of our team today to learn more about how we keep corporate cash safe and get started with full government protection.


1 Granja, J. (2023, April). Bank fragility and reclassification of securities into HTM. University of Chicago.


*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.