Bank securities are the stocks, bonds, and securitized products that banks either issue to raise capital or buy to hold in their own investment portfolios. On the issuing side, a bank sells common stock, preferred stock, corporate bonds, and subordinated notes to meet regulatory capital requirements and fund operations. On the investing side, it holds Treasuries, municipal debt, and other high-quality instruments to stay liquid. If you’re being offered one of these products, the type matters more than the brand on the door: each carries a different place in the repayment line, a different tax treatment, and different rules about disclosure and insurance.
Stock a Bank Issues
Common stock is the most straightforward form. Buyers become partial owners, share in profits through dividends, and vote on major corporate decisions. For the bank, common stock and retained earnings make up Common Equity Tier 1 (CET1) capital, the most loss-absorbing layer of its financial base because it’s permanent and absorbs losses as they happen, before any creditor takes a hit.1Federal Deposit Insurance Corporation. Section 2.1 Capital – Section: Components of Capital
Preferred stock sits one step below common stock in quality but one step above it in the payout line. Preferred shareholders typically receive fixed dividends and have a higher claim on remaining assets if the bank is liquidated. Qualifying noncumulative perpetual preferred stock counts toward the bank’s Additional Tier 1 capital.1Federal Deposit Insurance Corporation. Section 2.1 Capital – Section: Components of Capital
Owning bank stock doesn’t guarantee a steady dividend. Federal rules cap what a member bank can pay: total dividends declared in a calendar year cannot exceed the current-year net income plus retained net income from the prior two years, unless the Federal Reserve Board approves the excess.2eCFR. 12 CFR 208.5 – Dividends and Other Distributions A bank also cannot pay a dividend that would exceed its undivided profits without both Board approval and a two-thirds vote of shareholders. If capital ratios fall below regulatory minimums, dividends and buybacks are restricted further.
Bonds and Subordinated Notes a Bank Issues
Instead of selling ownership, a bank can borrow from investors by issuing debt. Corporate bonds are the familiar form: the bank promises to repay principal with interest over a fixed period. Proceeds fund general operations, refinance existing obligations, or support growth.
Subordinated notes are a distinct product with a regulatory purpose. They must have an original maturity of at least five years and sit below other creditors in the repayment line. If the bank fails, depositors and senior creditors get paid first, and subordinated debt holders absorb losses before them.3eCFR. Appendix A to Part 225, Title 12 – Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure That lower priority is precisely what makes subordinated debt count toward Tier 2 capital. The trade-off for investors is a higher interest rate for bearing more risk.
What Banks Hold in Their Own Portfolios
Banks also buy securities. Every bank keeps an investment portfolio separate from its loan book to provide liquidity, generate income, and offset the interest rate risk of long-term lending. Federal regulations under 12 CFR Part 1 control what national banks can purchase for their own accounts, classifying eligible investments into five types by quality and issuer.4eCFR. 12 CFR Part 1 – Investment Securities
- Type I covers U.S. government obligations, securities backed by the full faith and credit of the government, and general obligations of states and municipalities. Banks can hold these without dollar limits.
- Type II covers certain state housing and university bonds plus obligations of international development banks, capped at 10 percent of the bank’s capital and surplus per issuer.
- Type III covers investment-grade corporate bonds and municipal bonds that don’t qualify as Type I or II, with the same 10 percent per-issuer cap.
- Types IV and V cover small-business-related securities and certain other securitized instruments, each with their own concentration limits.
Treasuries dominate the mix because they’re backed by the full faith and credit of the federal government and can be sold in any market environment.5TreasuryDirect. About Treasury Marketable Securities Large banks must hold enough high-quality liquid assets to cover 100 percent of projected net cash outflows over a 30-day stress period under the Liquidity Coverage Ratio rule.6Federal Register. Liquidity Coverage Ratio: Liquidity Risk Measurement Standards
Banks can hold securities for liquidity and income but generally cannot trade them for short-term profit. The Volcker Rule, codified at 12 U.S.C. § 1851 and implemented through 12 CFR Part 44, prohibits banking entities from proprietary trading — buying or selling principally to profit from near-term price movements.7eCFR. Part 44 – Proprietary Trading and Certain Interests in and Relationships with Covered Funds A position held for at least 60 days is presumed not to be proprietary trading, and there are carve-outs for underwriting, market-making, documented liquidity management, and U.S. government securities.
Mortgage-Backed and Asset-Backed Securities
A bank can originate thousands of home mortgages, bundle them into a pool, and sell slices of that pool to investors as mortgage-backed securities. The bank gets immediate cash for new loans; the investor gets a stream of payments funded by the borrowers’ monthly checks. Asset-backed securities work the same way but with auto loans, credit card balances, or student loans as the underlying collateral.
These pools are transferred to a separate legal entity called a special purpose vehicle, which exists to wall off the loans from the bank’s own financial health. If the bank later runs into trouble, a properly structured SPV keeps those loan assets out of the bank’s bankruptcy. Deals also use credit enhancement — subordination into tranches, overcollateralization, and excess spread — to make senior slices safer for investors.
FDIC Insurance Does Not Cover Bank Securities
This is the point that trips up the most buyers. FDIC deposit insurance covers checking, savings, CDs, and money market deposit accounts up to $250,000 per depositor, per bank. It does not cover stocks, bonds, mutual funds, annuities, or any other investment product, even when you buy them at the teller window of an FDIC-insured bank.8FDIC. Financial Products That Are Not Insured by the FDIC If the investment loses value, there is no federal safety net. A bond fund sold at your bank branch is not a CD, and the distinction matters most when the person selling it is someone you’ve banked with for years.
Risks by Instrument Type
Interest rate risk is the dominant concern for fixed-rate instruments like bonds and preferred stock. When market rates rise, the fixed payments from an existing bond become less attractive, and its market value drops. For long-duration instruments the price decline can be significant; the 2022–2023 rate-hiking cycle demonstrated this when unrealized losses on bank-held securities triggered a crisis of confidence at several institutions.9Office of the Comptroller of the Currency. Interest Rate Risk, Comptroller’s Handbook
Credit risk depends on where you sit in the repayment hierarchy. Holders of a bank’s subordinated debt accept that depositors and senior creditors are paid first. If the bank becomes insolvent, subordinated holders may recover a fraction of their investment or nothing at all. That is why these notes pay higher yields than senior bonds from the same bank.3eCFR. Appendix A to Part 225, Title 12 – Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure
Mortgage-backed and asset-backed securities add prepayment risk. When rates fall, borrowers refinance and investors get principal back earlier than expected, often forcing reinvestment at lower rates. When rates rise, borrowers stay put and investors hold a lower-yielding asset for longer than anticipated. Credit enhancement helps with default risk but does not eliminate it, and junior tranches carry meaningful exposure.
Tax Treatment
Dividends from bank common stock are typically classified as qualified dividends, taxed at the lower long-term capital gains rates rather than ordinary income rates, provided you meet the standard holding period. The Form 1099-DIV will break out which portion qualifies.10Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions Preferred stock dividends from banks also generally qualify, though some preferred issues pay dividends that are treated as ordinary income depending on the terms. Check the prospectus.
Interest income from bank-issued bonds and subordinated notes is taxed as ordinary income at your marginal federal rate. There is no special break for bank debt compared to any other corporate bond. Municipal bonds held in a bank’s own portfolio receive favorable tax treatment at the bank level, but a bank’s corporate bond in your account is fully taxable to you. Capital gains and losses from selling bank securities before maturity follow the standard short-term and long-term rules.
How Bank Securities Are Regulated and Disclosed
Bank securities sit at the intersection of securities law and banking law, and the split confuses even experienced investors.
The Securities Act of 1933, codified at 15 U.S.C. § 77a and following sections, generally requires any entity selling securities to register them with the SEC and provide detailed disclosures.11U.S. Securities and Exchange Commission. Statutes and Regulations for the Securities and Exchange Commission and Major Securities Laws But securities a bank issues directly — its own stock and bonds — are generally exempt from SEC registration under Section 3(a)(2). Because banks are already subject to intensive oversight from banking regulators, Congress decided they did not need the added layer of SEC registration for their own instruments. Antifraud provisions still apply.12GovInfo. Securities Act of 1933
Mortgage-backed and asset-backed securities are different. When a bank packages loans and sells them to investors through an SPV, those securities typically do require SEC registration and full prospectus-level disclosure, because the SPV is not itself a bank. Investors in MBS and ABS need detailed data about the underlying loans to assess risk, and that is where the Securities Act’s transparency requirements apply in full.
On the banking side, the OCC, Federal Reserve, and FDIC oversee safety and soundness. The authority for what national banks can actually do with securities traces to 12 U.S.C. § 24 (Seventh), which grants national banks the power to buy and sell investment securities for their own accounts under restrictions set by the Comptroller of the Currency. The statute limits holdings in any single issuer’s securities to 10 percent of the bank’s paid-in capital and unimpaired surplus, with government obligations exempt from that cap.13Office of the Law Revision Counsel. 12 U.S. Code 24 – Corporate Powers of Associations
If you want to see the numbers for a specific bank, two sources are worth knowing. Publicly traded banks file annual 10-K reports with the SEC. Item 7A covers quantitative and qualitative disclosures about market risk, including interest rate exposure from the securities portfolio, and Item 8 contains audited financial statements with notes on the fair value of investment holdings. Separately, every insured bank files quarterly Consolidated Reports of Condition and Income, commonly called Call Reports, with its primary federal regulator.14FDIC. Consolidated Reports of Condition and Income Call Report data is public and lets anyone track how a bank’s securities holdings and capital ratios shift over time.