As of September 30, 2009, the four largest banks in the US have stacked up almost $1.53 trillion in liquidity or a combined liquidity of 67%. The amount equals 21% of the banks’ total assets, up from 15% in June 2008. Liquidity includes cash, deposits at other banks and debt securities that can be pledged as collateral in exchange for overnight borrowings from the Federal Reserve or other banks.
Citigroup’s total liquidity as of September 30, 2009 was $450.3 billion, or 24% of its assets, compared to 16% in June 2008. Citibank’s third-quarter results, when interest income fell by $1.4 billion from a year earlier, pushing Citigroup to an operating loss of $750 million, highlighted the unprecedented increase in cash reserves. Citigroup almost doubled its cash to $244.2 billion in the year following Lehman’s bankruptcy, the biggest such stockpile of any US bank. If Citigroup’s cash and deposits, which earn 0.63%, had been put into loans, would least $8.65 billion more at 7.2% annual interest revenue. The risk is that if some of those loans went bad the bank would lose more than the incremental revenue it is currently drawing from its liquid assets.
JPM, with its “fortress balance sheet” principle has increased its total liquidity to $453.6 billion as of September 30, 2009. This also includes $80.7 billion in cash and deposits at other banks. The increased liquidity contributes almost 22% to its total assets, up from 9.5% during June 2008 or before the Lehman bankruptcy.
Bank of America, which like Citigroup, also got a $45 billion US bailout, increased its holdings of cash, time deposits and debt securities to $422.6 billion, or 19% of its overall assets, from 17% in June 2008, according to company reports.
By the end of this year, the Basel committee also plans to propose a “new minimum global liquidity standard” which would probably be higher than the pre-crisis levels maintained by the banks.
Considering the precarious episode Citigroup had been through in the past year, I believe it would rather be better off hoarding up on cash than risking a liquidity crunch once again. JPM, BAC and Wells Fargo’s liquidity and diversity of funding sources would only do good to meet actual and contingent liabilities through both stable and adverse conditions. After the current shock the TBTF banks have gone through, it is rather obvious that they will augment their reserves, so that we as investors have no nightmares…