Do unrealized bank losses affect loan pricing?

As central banks tighten their monetary policies, long-term assets, like sovereign bonds, may experience significant drops in their market values. While holding securities until maturity shields banks from direct capital losses resulting from increasing rates, the risk of materialization of unrealized losses from HTM portfolio may affect bank loan supply decisions. I find that banks with 1 pp higher share of unrealized losses in their risk-weighted assets charge on average 8 bps higher lending rates to corporates in Slovenia. These unrealized losses have a lower impact compared to actual changes in capital, for which the literature establishes the impact of around 10–25 bps. [ABSTRACT FROM AUTHOR]

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