AFS/HTM Considerations for Tangible Book Equity

Much discussion year-to-date has been centered on the backup in U.S. Treasury rates and the implications on fixed income pricing.  With interest rates across the curve continuing to move higher through Q3 and into October, many bonds are trading at prices not seen in over 15 years.  We have discussed at length the temporary nature of this and the lack of impact on regulatory capital ratios, legal lending limits, etc.  However, many banks have seen their tangible capital (i.e., leverage ratio including unrealized losses on AFS portfolio) dip to low single digits and in some instances below 0%.  We wanted to highlight and reiterate some of the potential implications of this ratios moving lower as well as pros and cons of evaluating a shift from AFS to HTM classification for select investments.

Fannie Mae, Freddie Mac, and FHLB do have some criterion whereby the tangible capital or tangible capital ratio can come into play and impact banks’ ability to utilize certain services.  Below is a list of examples:

  • Fannie Mae & Freddie Mac – Counterparties must maintain tangible capital of $2.5MM plus 0.25% of the Seller/Servicer’s unpaid balance of all mortgages it services directly.  There are also other criteria such as tangible capital volatility.
  • Federal Home Loan Banks – The FHFA requires that FHLB Banks seek permission from an institutions primary federal regulator to originate new borrowings if tangible capital is below $0.  All existing borrowings can continue to be renewed into max 30-day borrowings and continue to be rolled beyond the 30-day term.  Currently, the ABA, the ICBA, and many other associations are petitioning the FHFA to shift to regulatory capital vs the current tangible capital framework. 

One way to reduce risk for the above events could be to consider shifting select investments from AFS to HTM.  Below is a summary of some of the benefits/drawbacks of this action:


  • Less reduction in Tangible Capital and Tangible Capital Ratio as rates move higher
  • Less likely to see risks noted above from FNMA, FHLMC, and FHLB
  • Less future volatility in book value of equity


  • Reduces ability to reposition the portfolio when rates come back down; “locks in” current unrealized loss
  • Additional CECL impact on municipal holdings in HTM
  • Perceived liquidity reduction in HTM; however, many of these bonds are still pledge-able to FHLB, FRB, or correspondents

From a regulatory perspective, we have seen generally favorable exams amongst our clients, especially within the area of investments and capital.  Regulators have made it clear they view unrealized losses within the portfolio caused by higher market yields as temporary, not credit-related or permanent.  Ultimately, there is no one-size fits all approach to this given unique balance sheets and considerations.  Often, accounting firms must be consulted on any material shift in portfolio designation.