Let’s say that all of the bank’s security portfolio is HTM. Now let’s assume that interest rates rise sharply from nearly zero to 3-4% in five years time. Now accounting-wise, there is no capital losses recorded on either the income statement or the bank’s equity. But in terms of valuation, do we not need to pass through that loss in earnings, and hence, the book value of equity in each period (adjusting taxes for the non-existing expense) in order to get a more proper valuation from clean surplus accounting?
If the security portfolio is either AFS, or HFT, and still held to maturity, the effect on valuation should be unchanged.