FORTUNE — Earlier this week, at an investor conference, JPMorgan Chase’s CFO Marianne Lake said her bank could see a $15 billion drop in the value of its bond portfolio if interest rates were to rise two percentage points. In April, JPMorgan (JPM) CEO Jamie Dimon said in his annual letter to shareholders that a 3 percentage point rise in interest rates would produce $5 billion in additional profits in the next year.
Interest rates have always been a two-edged sword for banks, even more so recently. In the wake of the financial crisis, banks piled into bonds in order to generate income at a time when loan demand was weak. JPMorgan’s bond portfolio, for instance, has nearly tripled to $333 billion since mid-2008.
Now that interest rates are rising, those investments are falling in value. In the second quarter alone, the portfolios of Bank of America (BAC), Citigroup (C), JPMorgan, and Wells Fargo (WFC) dropped a collective $13 billion.
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At the same time, low rates have plagued banks as well, reducing what they can charge borrowers. Higher interest rates would allow banks to get higher interest payments and boost lending income. That’s the part of the equation Dimon was talking about. The question is what edge of the sword is sharper.
JPMorgan’s CFO Lake in her presentation said for that for the next year or so the two forces will essentially balance out. After that, the bank would see the benefit from higher interest payments. Favorable accounting helps. Banks can exclude losses on their bond portfolio, as long as they hold onto the investments, from their profit and loss statements. Higher lending income from rising rates, however, goes right to the bottom line.
Bond losses do reduce the amount of capital a bank has, which can curtail lending. Also banks are required to hold a level of minimum capital, which has been raised significantly since the financial crisis. But as long as a bank can replace the capital it lost in its bond portfolio relatively quickly from higher earnings, then everything works out fine. Lake said by JPMorgan’s calculations the bank should be able to replace the capital losses in its bond portfolio within three years, not long enough to cause a problem.
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But those calculations are based on a number of assumptions, which don’t always work out. For instance, in the second quarter, when interest rates on the 10-year Treasury bond rose nearly two-thirds of a percentage point, JPMorgan’s bond portfolio dropped, down $3.3 billion, as expected, but so did its net interest income. So much for the offset.
The good news is that JPMorgan is being upfront with its investors. Analyst Moshe Orenbach of Credit Suisse says proportionally the losses could be much worse at Wells Fargo, which has a smaller bond portfolio, but also less capital than JPMorgan. Yet that bank and others remain tight-lipped about potential bond losses.
“JPMorgan is a large bank, so the number is large,” says Orenbach. “If rates do actually shoot up, this is something the banks will have to deal with.”
Update: An earlier version of this story implied that JPMorgan had changed its outlook on how a rise in interest rates would affect the bank. That is not the case, and the story has been updated to reflect that.