US regional banks, with assets between $50bn and $250bn, had their lowest cash reserves since the 2008 financial crisis at the start of 2023. As interest rates rose, they cut the percentage of assets held in cash from an average of 13% to 7%, according to data from the Federal Deposit Insurance Corporation. This left them unprepared for deposit outflows that led to the collapse of Silicon Valley Bank and Signature Bank. In contrast, larger and more strictly regulated banks such as Citigroup and JPMorgan Chase held on average 15% of their assets in cash, making them more resilient. Analysts noted that investors had been closely scrutinising banks’ available cash, which contributed to the panic in bank stocks during the recent events.
A recent article in the Financial Times highlights the low levels of cash reserves held by regional banks in the US, which have become a cause for concern. The drop in cash holdings has been attributed to a number of factors, including the US Federal Reserve’s interest rate increases, which have squeezed spread income, forcing regional and community banks to put more of their cash to work in order to generate profits.
Additionally, the new liquidity rules imposed on banks after the financial crisis have required most banks with over $50 billion in assets to hold more than 10% of their assets and deposits in cash. However, lawmakers voted in 2018 to loosen regulations for banks with less than $250 billion in assets, resulting in cash levels at regional banks with $50 billion to $250 billion starting to fall.
This lack of cash has become a major issue for regional banks well beyond SVB and Signature, with banks like First Republic entering 2023 with just 2% of its assets in cash, experiencing large deposit outflows after SVB failed, and ultimately requiring the nation’s largest banks to deposit $30 billion in cash with them to stabilize their share price.
Western Alliance Bank had just $1 billion in cash at the beginning of 2023, just 1.5% of its $67 billion in deposits, with its shares dropping by half in the past month. Shares of KeyCorp, which started the year with just over $3 billion in cash, or less than 2% of its $188 billion of deposits, are down 30% this month. Citigroup, on the other hand, had nearly 25% of its deposits in cash at the end of last year, the most out of any of the large banks.
Smaller banks have moved their assets from cash into bonds that pay modest interest income, risking losses if they need those funds to repay depositors. For instance, SVB’s cash holdings as a share of total assets dropped from $22 billion, or 14%, in mid-2021 to $12 billion, or just 6%, in early 2023, with its bond portfolio rising from $83 billion to $117 billion and its loans from $50 billion to $72 billion.
“A lot of banks are doing what they can to make sure their cash positions look sufficient when their financials come out at the end of the quarter,” said Scott Hildenbrand, chief balance sheet strategist at Piper Sandler. “They are fighting a perception, and no one wants to be the bank people are worried about.”