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The Split Between Cash, Securities, and Loans
December 13, 2022 | Wholesale Funding Update
In our previous updates, we’ve focused on the changes to bank liabilities over the past year, highlighting declining core deposits and rising wholesale funding. In this week’s update, we look at the asset side of the balance sheet.
Cash, securities, and loans make up the majority of a bank’s assets. Over the past 20 years, the three asset classes have accounted for 90% of a bank’s balance sheet on average . For the typical bank, the breakdown is normally straightforward; loans make up ~63% of assets, enough cash is held to cover liquidity requirements, and securities are used to boost income whilst maintaining liquidity (see figure below).
Banks saw a huge inflow of deposits during the pandemic, increasing their cash allocations to their highest level on record. At its peak at the end of Q1 2021, cash made up 12% of assets for the median bank. Since then, cash allocations have fallen by half, and, at the end of Q3 2022, the median bank now holds only 6% of assets in cash.
Securities as a percent of assets are now at their highest level on record, as rising interest rates have made the yields on treasurys, money market instruments, and MBSs attractive. As of Q3 2022, securities make up 22% of assets for the median bank, up from 16% in Q1 2021. Loans as a percent of assets fell during the pandemic as cash allocations peaked but are recovering as the allocation to cash declines.
Moving forward, we expect cash levels to stabilize at pre-pandemic levels. It will be interesting to watch the securities vs loans allocation as rates continue to rise and recession fears remain.
Paolo and the ModernFi Team
 The remaining 10% is made up of a variety of items like reverse repos, trading assets, real estate, and goodwill.
Change from two weeks ago
Sources: FHLB Advances are an average of FHLB Boston, FHLB Chicago, and FHLB Des Moines. Brokered CDs are an average of Fidelity and Vanguard. Listed CDs provided by National CD Rateline. US Treasurys and LIBOR provided by WSJ. SOFR provided by CME.
Figure is constructed using quarterly data from the FDIC’s BankFind Suite API. Fields used include CHBAL for cash and balances due, SC for securities, LNLSNET for net loans and leases, and ASSET for total assets.