08. Other Comprehensive Income: the loss that skips the P&L but hits CET1
Some of a bank's biggest losses never pass through profit or loss — yet they still hit its capital.
#BankingRegulation #OCI #CET1 #CreditRisk #RiskManagement #BankingMetricsSeries
That is Other Comprehensive Income (OCI): where accounting parks gains and losses that are real but not yet realised — a bond portfolio repricing, a pension remeasurement, a currency translation. They sit in equity, in a reserve called Accumulated OCI, not in the income statement.
Basel III made a deliberate choice: almost all of that reserve flows straight into CET1. If fair value has fallen, the loss is economically real, so capital should already show it. The EU keeps only a few filters — cash-flow hedges and own-credit gains (CRR Art. 33).
So when rates rise, fixed-rate bonds lose value, the OCI reserve turns negative, and CET1 falls — no default, no sale.
❌ In 2023 Silicon Valley Bank used a US option Europe does not allow: it left these losses out of capital. CET1 looked fine — until it sold the bonds, booked a $1.8bn loss, and the default began.
Full mechanics in the carousel 👇
