U.S. bank balance sheets are flat over the past year — something that typically only happens during a recession, according to a new report from Moody’s Investors Service.
Based on the latest weekly data from the U.S. Federal Reserve Board, the rating agency reported that bank balance sheets fell slightly in early November, as both deposits and loans were lower.
Total assets were down by US$13 billion, as deposits decreased by US$56 billion for the week, primarily at the large banks. Loan balances also declined by about US$20 billion, although this was largely offset by higher cash holdings, the report said.
“Commercial and industrial loans decreased US$15 billion, mostly at the large banks,” it said, noting that loans to non-bank financial institutions declined by US$3 billion on the week, reversing a growth trend throughout the year.
“Credit card loans were unchanged, but other consumer loans declined,” it said.
Looking at the bigger picture, Moody’s noted that bank deposits are down by US$714 billion since the failure of Silicon Valley Bank (SVB) back in March.
“Bank deposits have been declining since the Federal Reserve started quantitative tightening, with the decline accelerating following SVB’s failure,” it said.
Amid declining deposits, banks have turned to other sources of funding, including term deposits and borrowing, which are up US$394 billion and US$344 billion, respectively, since the failure of SVB, it said.
“These sources of funding have defined contractual maturities that can help promote near-term funding stability but come at a significantly higher cost to banks,” Moody’s said, adding that this weighed on banks’ margins and earnings, a trend that is expected to continue into 2024.
On a year-over-year basis, U.S. banks’ balance sheets are flat, “which usually occurs only during recessions, with bank funding under pressure,” the report said.
Moody’s also noted that U.S. banks’ holdings of government securities have declined since the failure of SVB, with these holdings now down US$294 billion over the period. However, banks still hold about US$900 billion more in government securities than they did before the pandemic.
Since the failure of SVB, most of the industry’s loan growth has come from credit card loans at large banks and loans to non-bank financial institutions, it reported.
“Commercial real estate loans have also increased since the failure of SVB, despite rising risks in the asset class, driven exclusively by growth at small banks,” it said.