By Michael Rapoport
Banks are shuffling big chunks of their securities portfolios
around the balance sheet to shield capital levels from rising
interest rates.
The moves, also encouraged by recent changes by regulators in
bank-capital requirements, mean that billions of dollars in bonds
and other debt held by banks have gone from being available for
sale at a moment's notice to being parked in an area of their books
where they can't easily be traded.
In the 18 months ended Dec. 31, U.S. banks moved $293 billion of
their securities investments to the "held to maturity" bucket on
their balance sheets, according to data from the Federal Deposit
Insurance Corp. that covers more than 6,500 banks.
That 84% increase since June 30, 2013, means that about $640
billion, or one in five dollars in banks' securities portfolios,
can't be sold easily, up from about one in nine dollars in
mid-2013.
The change shields banks' capital if interest rates move higher,
as many expect them to later this year, but could put them in a
bind if financial conditions deteriorate and they need to raise
cash fast.
"Held to maturity has grown by just leaps and bounds," said Greg
Hertrich, head of U.S. depository strategies for Nomura Securities
International.
Last Wednesday, the Federal Reserve opened the door to raising
the federal-funds target rate for the first time since 2006 by
dropping an assurance that it would remain "patient" before acting.
Higher rates will likely make banks' lending businesses more
profitable by increasing the spread between the rate at which they
borrow and the rate at which they lend. But the shift of
investments shows banks also are looking to protect themselves
against the potential pitfalls of higher rates.
When rates rise, the value of the debt securities that make up
most of banks' portfolios will fall because the relatively low
rates on existing bonds will look unattractive compared with the
higher yields on new bonds.
If a security is held to maturity, its loss of value doesn't
affect banks' capital levels. Under the alternative, "available for
sale," the biggest banks must count gains and losses in the prices
of those securities as part of their Tier 1 common equity, a key
measure of regulatory capital under new global bank-capital rules
known as Basel III.
That makes available for sale less attractive and held to
maturity more enticing.
The big shift in securities portfolios shows banks increasingly
striving to keep their financial ratios strong in a new
rising-interest-rate environment, while also being responsive to
new regulations.
But some warn that banks' decision to move assets could limit
their flexibility later in raising cash.
Once banks put securities into the held-to-maturity bucket, they
generally aren't permitted under accounting rules to take them out
and sell them.
It is "not in the best interests for the bank," to move
securities into the held-to-maturity bucket, said Gerard Cassidy,
an analyst with RBC Capital Markets. "They're just going to
restrict themselves" and leave themselves "handcuffed."
Banks respond that they have big buffers of cash and other
securities that they could sell freely if needed.
J.P. Morgan Chase & Co., for example, has moved $49.3
billion of its securities into the held-to-maturity bucket since
mid-2013. Wells Fargo & Co. has moved $55.5 billion there over
the same period. Both banks had less than $10 million as of
mid-2013.
Regional banks have gone even further, analysts said, in part
because they don't have big trading businesses that heighten the
need to stay flexible and keep cash on hand.
U.S. Bancorp had about 45% of its securities portfolio in held
to maturity and Capital One Financial Corp. had 36%, as of the end
of 2014. By contrast, big national banks on average had only about
15%.
Spokesmen for Capital One and U.S. Bancorp declined to
comment.
The trend is likely to continue, analysts said, partly because
Basel III requirements encouraging banks to hold more liquid
securities still are being phased in.
"We've only seen the beginning," said Anthony Carfang, a partner
and director at Treasury Strategies, a consulting firm.
Banks say they have made the moves partly because of the new
regulatory initiatives as well as a desire to keep their capital
ratios from bouncing up and down with rate moves.
J.P. Morgan said in its latest annual report in February that
its shift of securities stemmed from both a desire "to reduce the
impact of price volatility...and certain capital measures under
Basel III."
If rates fall, putting more assets in held to maturity will keep
capital levels lower than they would be otherwise, because banks
will be forgoing gains they could have earned on their
securities
Capital ratios have grown in importance since the financial
crisis because they are used by the Federal Reserve to measure a
bank's financial health and in the case of large banks, to help
determine whether a bank can increase dividends and share
buybacks.
Profits are also affected, albeit indirectly. Holding a security
to maturity allows a bank to ignore fluctuations in market prices
in a profit metric known as "other comprehensive income," which
over time can trickle down to a company's bottom line.
Moving securities out of the held-to-maturity bucket isn't
unheard of.
In 2011, Citigroup Inc. reclassified and later sold $12.7
billion in securities out of held to maturity, as part of an effort
to meet new regulatory capital requirements.
Citi had previously moved those securities into held to maturity
in 2008, in response to deteriorating market conditions during the
financial crisis.
Citigroup declined to comment.
The shift "comes as a concession to corporate flexibility," said
Kamal Hosein, head of fixed income strategies for securities firm
Sterne Agee & Leach Inc. Mr. Hosein says he thinks it's
"ridiculous" that a shift prompted in part by a requirement seeking
increased financial flexibility for banks could actually limit
banks' ability to sell some securities.
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