Analysis: US banks hold $3.3 trillion cash amid banking crisis, slowdown worries

Signature Bank

05/09/2023 11:00

By Saeed Azhar and Ann Saphir
       NEW YORK/SAN FRANCISCO, Sept 5 (Reuters) - U.S. lenders
are holding onto large piles of cash as insurance against a
slowing economy, continuing deposit outflows and looming tougher
liquidity rules that could particularly impact  mid-sized banks.
    The buildup is another example of a risk-averse approach
from a sector still trying to regain its footing after a string
of springtime bank failures, one which could result in
restrained lending.
    "This is a logical response to a slowing economy and
particularly to a scenario, where you're seeing deposit outflows
and you need to conserve cash," said David Fanger, senior vice
president at Moody's rating agency.
    "What happened in March was a big wake-up call." 
    The collapse of Silicon Valley Bank and Signature Bank in
March triggered massive deposit withdrawals and placed renewed
focus on lenders' financial health. More recently, the sector
was hit by ratings downgrades when S&P last month cut credit
ratings and revised its outlook for multiple U.S. banks,
following a similar move by Moody's.
    Overall U.S. banks' cash assets were $3.26 trillion as of
Aug. 23, up 5.4% from the end of 2022. That was well above
typical pre-pandemic levels, though down from the weeks
immediately following the bank failures in March, Federal
Reserve data shows.
    
    Cash assets at small and mid-sized lenders are up 12%
compared with the start of the year; at the nation's top 25
banks, cash holdings are up about 2.9%.
    
  
    
    Large banks including JPMorgan and Bank of America declined
to comment beyond the disclosures, but pointed to their
executives' comments about reasons such as the Fed shrinking its
balance sheet, falling deposits and higher short-term rates.
    The SVB failure triggered a sudden dash for cash at banks,
which within two weeks had bulked up cash assets to $3.49
trillion, the highest level since April 2022. That has pulled
back since then, but is still almost twice as high as
pre-pandemic.
    Banks need higher cash levels to meet liabilities as
customers withdraw deposits, and to offset risks such as loan
losses as the Federal Reserve keeps interest rates high to cool
economic growth and inflation.
    "A lot of banks are taking steps to reduce risk and
strengthen their balance sheets," said Brendan Browne, S&P's
senior credit analyst for financial institutions.
    Regional banks are shifting more "earning assets," such as
those from lending activities, into cash or short-term
securities, said Manan Gosalia, an analyst at Morgan Stanley,
who covers regional banks.
    "As banks see further pressure on deposit costs, and as they
hold higher levels of liquidity, we expect loan growth will
continue to slow as we get to the end of this year," he said.
    S&P forecasts 2% loan growth this year, after an almost 9%
gain last year.
    
    STRICTER RULES
    Mid-sized banks are also worried about upcoming regulations,
analysts said.
    U.S. regulators have said they will likely impose stricter
capital and liquidity requirements on banks with $100 billion or
more in assets. 
    Since March, regulatory focus has heightened, prompting
banks to focus on key capabilities in liquidity and asset
liability management, bankers and analysts said. 
    "Regulators are going to have a shorter fuse" for banks that
have any gaps in managing their liquidity and the loans held on
their books, said Peter Marshall, leader of EY's financial
services liquidity advisory group.
    The Fed's aggressive tightening since March 2022 put a lot
of banks' longer-term securities under water, creating investor
anxiety over the health of bank balance sheets. 
    Since then, banks are taking steps to boost liquidity by
reducing investments in securities or selling them at a loss.
    S&P estimated the value of these securities for FDIC-insured
banks had more than $550 billion of unrealized losses on their
available-for-sale and held-to-maturity securities as of June
30.
    Bank of America  BAC.N  said in a July presentation it sold
$93 billion from the available-for-sale segment of the balance
sheet in the first two quarters and added the proceeds to cash,
which stood at $374 billion at the end of June, its
second-quarter earnings data showed. 
    It further showed cash, which was deployed in money markets,
 was generating better returns than keeping it in low-yielding
securities. 
    Bigger rival JPMorgan  JPM.N  has been selling securities
for the past year. It has $420 billion in cash and $990 billion
of what it calls high quality liquidity assets and other
unencumbered securities, it said.
    "The good news is for some of these banks re-investing cash
is that we have pretty high short-term rates," said Mac Sykes,
portfolio manager at Gabelli Funds.
    "It's definitely opportunistic and advantageous to be
investing short-term securities."

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U.S. banks are stashing more cash    https://tmsnrt.rs/3L11wPS
Rise and fall of U.S. bank deposits    https://tmsnrt.rs/3qJ74rr
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 (Reporting by Saeed Azhar and Ann Saphir; additional reporting
by Niket Nishant; editing by Megan Davies, Nick Zieminski and
Richard Chang)
 ((Saeed.Azhar@thomsonreuters.com; +1 347 908-6341; Reuters
Messaging: saeed.azhar.reuters.com@reuters.net))