On Wednesday I wrote about how, over the past 90 days, the big four money centers have been shifting into cash and away from lending, trading, and holding reserves in securities. Those money centers are JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC) -- and, at least in these organizations, the pattern is clear.
The unclear aspect is the precise driving force behind this shift, and whether it is happening in other banks. It's possible the shift is being driven by regulators' increasing focus on the trading practices of the money centers, as exemplified by Wednesday's developments: Federal prosecutors have brought charges against two former JPMorgan traders concerning the 2012 London Whale trading scandal.
It's not unprecedented to see this kind of collective shift by all four of these money centers. In 2011, Bank of America began to accelerate its foreclosures in an attempt to clear its nonperforming mortgages -- and, in the process, BofA's recovery rate plunged and the stock price fell from about $15 in January to $5 by the end of the year. The demand for housing was not strong enough to handle the increase in supply. In response, all four money centers, including BofA, immediately suspended foreclosures.
I'll now examine a few other banks in an attempt to provide a bit more clarity to the issue of money centers' recent shift to "risk off." Specifically, I'll try to determine whether this is a response to regulatory action, or if it regards something more fundamental about the banks concerning near-term economic and financial market potential.
At Goldman Sachs (GS) -- the 17th-largest financial institution in the U.S., as measured by assets -- cash balances totaled $51 billion, or a whopping 45% of assets, at the end of the second quarter. That's up from about $50 billion in the first quarter. The past three years, moreover, have seen a doubling in the bank's cash balances and the percentage of total assets they represent. Goldman is stockpiling cash.
The firm reports all of its securities in its trading account, which has roughly stayed the same for the past three years at about $35 billion. Its loan book has increased, though, and in interesting ways. As with the money centers, Goldman has moved aggressively into making commercial and industrial (C&I) loans: The balance is now sitting at about $5.9 billion, up from about $5.7 billion at the end of the first quarter of this year. That's compares with under $1 billion three years ago.
All told, Goldman has been increasing its cash holdings within the last 90 days, though move isn't quite as pronounced as it's been at JPMorgan or the other money centers. Nonetheless, it is happening.
At the Bank of New York Mellon (BK), the seventh-largest U.S. bank and the largest Tri-Party Agent, cash balances rose about $1 billion in the last quarter. They are roughly in the range they've tracked for the past three years -- but they are still elevated, coming to about 40% of assets.
The bank's trading activity, and securities held, haven't changed materially in the last quarter. However, its lending activity has mostly been in the C&I space.
So Bank of New York isn't doesn't appear to be shifting away from risk quite to the extent that the big four are doing. But that shift is still there, and it is evident in the stagnation in the firm's trading and securities accounts.
Let's now drop down into the super regional and regional banks.
At Flagstar Bancorp (FBC), the 87th largest U.S. bank, cash balances have increased about 22% in the past quarter alone and tripled in the last year. At the same time, the value of its loan assets, securities held and trading book have all declined.
At Umpqua (UMPQ), the 92nd largest U.S. bank, cash balances have risen 12% in the last 90 days and almost 100% in the last year, while its securities portfolio has declined commensurately. But it has also had a slight increase in the value of its loan assets.
At Wintrust Financial (WTFC) -- the owner of 15 banks, and the 65th largest U.S. bank as a holding company -- we see the exact opposite occurring: Cash balances have declined by 25% in the last 90 days and 50% in the last year. Although its securities holdings were unchanged during that period, they are up about 30% in the past year. The value of Wintrust's loan book has risen in the past quarter and year, but this is predominantly due to increases in C&I loans.
The bottom line is that, although each institution is changing the composition of their assets in different ways, the top 100 institutions have predominantly been exhibiting a shift away from risk in the aggregate in the last 90 days.
Lastly, this shift may reflect issues that go beyond economic and specific regulatory, legal concerns, as in the London Whale case at JPMorgan. It may reveal worries on the part of all banks, with the Consumer Financial Protection Bureau in the nascent stages of broadening its audits into the banks that are below the money-center level.
I wish I could supply a greater level of certainty as to why this shift is occurring, but right now I cannot.