The recovery in global banks' balance sheets is under threat from a surge in bond yields, according to senior bank executives and analysts preparing for quarterly earnings season.
Banks have built giant portfolios of liquid securities, partly at the behest of regulators and also because they have not found better opportunities to lend a flood of deposits. Under new capital rules, unrealized losses in these "available for sale" portfolios hit banks' equity capital.
(Read More: Bond Losses of $1 Trillion if Yields Spike, BIS Says)
"I would think most institutions are going to have a fairly sizeable hit to their equity," said a senior executive of a top U.S. bank. "You've really had this concentrated one-to-two week period where all hell is breaking loose."
The composition of the balance sheets leaves banks vulnerable to the spike in interest rates. For example, Bank of America has a $315 billion securities portfolio, 90 percent of which is invested in mortgage-backed securities and Treasurys. As yields rise, prices fall.
(Read More: Why the Rise in Treasury Yields May Be OK)
In the U.S., the unrealised net gains on "available for sale" portfolios has slumped to $16.7 billion, its lowest level in two years, according to the latest Federal Reserve data. The metric tracks the performance of banks' AFS portfolios, largely comprised of mortgage-backed securities and Treasuries, and the fall represents a drop of more than 50 percent in two months.