What Do The Largest U.S. Banks Know That We Don't Know?

by: John M. Mason


Assets and loans at the largest domestically chartered banks fell in December during holiday season.

Is this a sign of a slowing economy?

There is concern about commercial real estate loans at commercial banks, is their growth in the banking system a holdover from the Great Recession?

Bank The total assets held by the largest 25, domestically chartered commercial banks in the United States, according to the Federal Reserve H.8 release, declined by almost $150 billion in December 2015.

At these large banks, Commercial and Industrial Loans fell by almost $11 billion and real estate loans dropped by close to $2 billion.

The consumer lending at these banks also fell, revolving home equity loans dropped by almost $8 billion, while consumer loans rose by close to $1 billion.

The only lending item that showed any bounce was commercial real estate loans, which rose by $6 billion.

It looks like a not-so-good Christmas for the biggest banks in the country. What is going on?

For the last quarter of the year, except for revolving home equity loans, the numbers are positive…not very positive…but positive.

But, it appears as if the largest 25, domestically chartered banks were drawing back during a season that usually sees them post some pretty hefty increases.

The one change in monetary policy that occurred during the month was the rise in the policy range for the Federal Reserve's target Federal Funds rate. This took place on December 16.

The effective Federal Funds rate jumped from around 15 basis points where it had been trading for much of the year, to around 36 basis points beginning on December 17.

In terms of the economy, the rate of increase in industrial production turned negative in November. The growth in industrial production had been declining for the second and third quarters in 2015, but after a very disappointing October figure, the year-over-year rate of decline in industrial production came in at a negative 1.2 percent.

There is evidence that the growth rate of the economy dropped off in the last quarter of 2015.

The question becomes, does the behavior of the biggest banks reflect a slow down in the economy that has not yet been picked up by the smaller, domestically chartered banks?

The smaller banks just continued to chug along.

The total assets of all domestically chartered banks smaller than the largest 25 actually rose in December by roughly $34 billion. All forms of lending activity increased.

The one big concern I have with the health of the domestically chartered commercial banks is their commercial real estate lending, especially at the banks smaller than the largest 25. I have written about this problem many times over the past six years or so.

Over the year, commercial real estate loans to the domestically chartered banks rose by $270 billion, with the smaller banks, with $120 billion of this total, outpacing the largest 25.

I don't believe that the commercial real estate sector has fully recovered from the Great Recession. A lot of commercial real estate projects survived the Great Recession because their loans did not come due until the end of the loan. As a consequence, these projects were in trouble, but were not signaled out as troubled loans at the banks because they were still "current" in terms of any payments they were responsible for.

At the end of the Great Recession and as the Federal Reserve carried out its three rounds of quantitative easing, these loans, as they matured, were re-written and the projects were even given more money in order to help them complete the projects. Commercial real estate lending grew faster than any other loan category at commercial banks during the subsequent recovery from the Great Recession, especially at the smaller, domestically chartered banks.

The economy did not grow very rapidly and the commercial banks did what they needed to do to extend loans and keep the projects flush with cash in order to complete their work. Hence, these projects were not filled with tenets upon completion. And, driving around projects, one sees signs indicating other projects to be built that are not under construction yet. Big shopping centers or malls were planned with movies, restaurants, and condos, and such, but many projects that didn't get started were not rushed into construction because of the tepid economic recovery.

I am not sure that all of these projects are going to make it. First of all, the economy has just not been growing that fast. These projects are not getting filled up. Second, there are lots of clouds on the horizon and with the stock market stalling and uncertainty about the world scene increasing, there may be a growing number of bad commercial real estate loans on bank books.

One other thing to mention: cash assets at commercial banks have been decreasing as the bank reserves at Federal Reserve banks have decreased.

I have traced, over the past six years, the movement of cash assets at commercial banks with these reserve balances at Federal Reserve banks and the correlation is very close. This has held true over the past 12 months.

On December 31, 2014, bank reserves at Federal Reserve banks were $2,328 billion while the cash assets at all commercial banks in the United States was $2,569 billion. The difference between the two numbers is the vault cash that the banks actually keep on hand.

On December 30, 2015, bank reserves totaled $2,209 billion while cash assets on the books of commercial banks totaled $2,454. So, as I have reported in several posts, the Fed has overseen a decline of $119 billion in reserve balances and commercial banks have observed a drop of $115 in cash assets.

There are some interesting facts in this decline.

The drop in cash assets came totally from domestically chartered banks with the decline at the largest 25 domestically chartered banks totaling $160 billion and a fall of $40 billion at the smaller domestically chartered banks. Foreign-related institutions actually increased their cash assets over the year by $85 billion!

As of December 30, 2015, foreign-related institutions accounted for $1,180 billion of the $2,254 billion in cash assets in the US banking system, 48 percent of the cash assets in the banking system. At the end of 2014, these banks held only 43 percent of the cash assets.

The largest 25 domestically chartered banks hold 39 percent of the cash assets in the US banking system while all the other domestically chartered banks hold on 13 percent of these assets.

In terms of the makeup of the US banking system, the largest 25 domestically chartered banks hold 56 percent of the total assets, the smaller domestically chartered banks hold 29 percent of the assets, and foreign-related institutions hold 15 percent.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.