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Wells Fargo Securities Writedowns Could Escalate

NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report) disclosed on Wednesday that a continued rise in interest rates could wipe out unrealized gains the nation's leading mortgage lender has made by holding mortgage securities on its balance sheet.

In a quarterly filing with the Securities and Exchange Commission, Wells Fargo disclosed that if interest rates rise 200-basis points, or 2%, the bank could face a writedown of up to $11 billion to its portfolio of mortgage backed securities. Such a scenario would likely wipe out gains made in Wells Fargo's $144-billion sized portfolio. Unrealized gains currently stand at $2.6 billion, Wells Fargo disclosed on Wednesday.

For the second quarter, Wells Fargo reported about a $6 billion writedown to its overall $250 billion available-for-sale (AFS) securities portfolio, putting total unrealized gains at just over $5 billion. The bank entered the year with unrealized gains on the portfolio of about $11.2 billion.

While unrealized gains and losses on securities holdings don't impact Wells Fargo's earnings, they do impact the bank's Basel III capital ratios.

The falling value of unrealized securities gains reflected the impact of rising interest rates and lowered Wells Fargo's estimated Basel III Tier 1 common equity ratio by 24 basis points in the second quarter.

Still, Wells Fargo saw its overall capital ratios improve in the quarter, as the bank posted a fourteenth quarter of earnings growth. The bank characterized its rising capital ratios as "a testament to the earnings power of Wells Fargo," in an earnings press release.

The San Francisco-based lender reported better-than-expected earnings of $5.5 billion, on revenue of $21.4 billion, beating estimates of $5 billion and $21.2 billion respectively.

Rising capital levels and falling unrealized securities gains were a trend in second quarter banking earnings. Of large-commercial banks, only Bank of America (BAC - Get Report) saw its capital levels fall in the quarter as a result of rising interest rates.

-- Written by Antoine Gara in New York

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