US BANKS / THE FINANCIAL TIMES LEX ( VERY HIGHLY RECOMMENDED READING )

US banks

Published: January 18 2010 09:26

Rolling in money sounds like a nice thing to do. But for US banks it is a mixed blessing. As of November, cash assets in the US banking system had more than tripled since before Lehman Brothers’ failure, accelerating to more than $1,200bn. Meanwhile, loans books have shrunk. Banks have understandably been stockpiling liquid assets ahead of expected higher liquidity requirements. Favourable markets mean companies have also raised money and then parked it at the bank. Cash now comprises more than 10 per cent of total banking assets, its highest for almost three decades.

Liquidity is at a premium. But hoarding cash is no way to make money, even if banks now earn some interest on deposits held at the central bank. The low interest rate environment, plus weak loan demand, means banks are struggling to deploy their ample funds profitably. They are rightly wary, perhaps, of interest rate rises to come.

That could fuel a renewed hunt for yield, as banks ramp up risk and return to structures that were designed to enhance returns in the boom. Moreover, points out Goldman Sachs, banks’ burgeoning cash pile has accompanied an 11 per cent growth in securities on bank balance sheets since the beginning of last year, as the yield-advantage of lending over owning securities has narrowed.

Loading up on, say, government bonds would suggest the industry is becoming more vulnerable to rising rates. These would also increase wholesale funding and deposit costs. Yet if higher rates are accompanied by a robust pick-up in loan demand, the combination may be no bad thing. Still, a higher discount rate depresses asset valuations and could boost delinquencies as home equity and commercial real estate loans are repriced. Banks are caught in a trap – cash-rich, opportunity-poor.

Copyright The Financial Times Limited 2010.