Sheila Bair is a former chair of the Federal Deposit Insurance Corporation.
Opinion The Fed’s ‘stress tests’ overlook the dangers facing banks
As we’ve seen already with several recent dramatic bank failures, when a bank has invested in long-term, low yield securities, even supposedly safe government-backed securities can lose substantial market value. This is because as rates rise, investors can buy more recently issued securities to get a bigger return. If a bank holds its securities until they mature, it can redeem them at par and not realize losses. However, if the bank is forced to sell those securities to meet depositor withdrawals, it will suffer significant losses.