Rising interest rates damaged the market value of banks' securities holdings again in the second quarter, but a shallower move in rates than the first quarter and countermeasures by the companies helped soften the blow to capital levels.

Other comprehensive income, or OCI, captures changes in the market value of available-for-sale portfolios. It recorded a loss of $28.93 billion in the second quarter across the 15 largest publicly traded banks in the U.S., according to data from S&P Global Market Intelligence. That was the second-largest swing in at least 13 quarters but less than the loss of $54.14 billion in the first quarter.

Bond prices, which move inversely with yields, were volatile in the period and threatened a hit comparable to the first quarter, but a rally since the middle of June eased the pain. Banks, especially large ones, have also been moving bonds into held-to-maturity portfolios, which are not marked quarterly. Big banks took further steps to protect capital positions, including managing risk-weighted assets lower, although both JPMorgan Chase & Co. and Citigroup Inc. paused share repurchases ahead of rising regulatory requirements.

Softer sting

Average Treasury rates across two-year to seven-year maturities, which cover the duration of much of banks' holdings, increased 60 basis points from March 31 to June 30, about half of the 118 basis-point increase from year-end to March 31.

OCI helped drive another sequential decline in tangible equity across most of the large bank group, though the drop was smaller at a median of 2.9% in the second quarter compared with 6.0% in the first quarter.

Tangible book value per share, which also reflects earnings and shareholder distributions, actually increased sequentially at Bank of America Corp. and Citi and was about flat at JPMorgan Chase.

Bank executives frequently argue that OCI is misleading since the marks reverse over time as bonds mature and other parts of the balance sheet, like interest-free deposits, are not marked.

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Countermeasures

In addition to its impact on tangible book value, OCI feeds into regulatory capital ratios for the biggest banks, including some that are seeking to increase theirs because of the tougher requirements.

Standardized common equity Tier 1 capital ratios actually increased sequentially 14 basis points at BofA and 52 basis points at Citi despite drags of 11 basis points and 12 basis points, respectively, attributed to OCI.

JPMorgan Chase's CET1 ratio increased 32 basis points sequentially as it cut its risk-weighted assets $43.59 billion to $1.707 trillion. "We may do that again next quarter," Chairman and CEO Jamie Dimon said on the bank's earnings call. "It's easy for us to do. ... We're going to drive out nonoperating deposits. It creates no risk to us, but it adds to" regulatory requirements.

As for the OCI outlook for the third quarter, markets could easily shift over the period, but medium-term and long-term rates have generally fallen over July as markets look to the Federal Reserve to cut rates next year. Average Treasury rates across two-year to seven-year maturities fell 24 basis points from June 30 to Aug. 1.