ommercial banks keep a significant proportion of their assets in the form of C fixed-income marketable securities (mostly government and municipal securities) that allows them a degree of flexibility to adjust assets quickly in response to changing economic conditions and to provide an important source of income. In 1981, 17% of commercial bank assets were in the form of fixed-income securities (Opper, 1982). To facilitate timely liquidation of these assets in meeting bank credit demand changes, the market value of these assets should be stable, In recent years, price stability has not been a characteristic of bank investment portfolios. The reason for the lack of price stability has been the volatility of market rates of interest caused largely by a combination of inflation and Federal Reserve monetary policy. The volatility of interest rates in recent years is demonstrated by the movement of the market yields on 20-year maturity US. Treasury bonds since 1978. Although the rate in January 1978 was only 8.14%, it had risen to 9.21% by April of 1979. Just one month later the rate had declined 30 basis points to 8.91 % before rising steadily again to 12.49% in February 1980. The rate then declined to 9.89% by May of the same year, only to rise again to 15.13% by September 1981. It then reversed itself dropping to 13.56% in October 1981 before rising 101 basis points in the next two months to 14.57%. By July 1982 the rate had declined once again to 12.91% (Federal Reserve Board).
As a result of the increased interest rate volatility, US.-insured commercial banks realized net securities losses of $225 million in 1978 , $350 million in 1979 , $492 million in 1980 , and $861 million in 1981 (Opper, 1982)). These figures do not indicate the unrealized losses that may also exist.
These losses are signdieant for a number of reasons. Of course they are significant to bank managers who must report them to their stockholders, but they are also important to the public whose confidence in banks is an important element in the functioning of the financial markets. Combining these losses with the fact that commercial banks tend to maintain low equity-to-total-asset ratios has caused concern within the banking community.
By their very nature, commercial banking operations have a close relationship