Securities exposure at US banks continued to decline in the second quarter as banks took a cautious approach to support balance sheet and liquidity positioning.
Total securities at US banks were down another 3.1%, or $175.09 billion, during the second quarter, recording the fifth consecutive sequential decline. The balances are down 13.2%, or $824.12 billion, since reaching the peak at the end of the first quarter of 2022.
Held-to-maturity debt securities declined for the second consecutive quarter to $2.594 trillion as of June 30, down 2.2% from the linked quarter and 7.2% since year-end 2022. Available-for-sale debt securities were down for the sixth consecutive quarter, roughly 31%, or $1.279 trillion, since the end of 2021.
Longer-dated and lower-yielding securities run off the balance sheets
As rates remain elevated and lending slows down, banks deploy cash from securities sales and paydowns into higher yielding short-term securities to match the rapidly rising deposit costs.
Medium-term bonds, or those repricing between three to 15 years, continued to decline at a relatively faster pace, down $96.69 billion, or 6.1%, from the previous quarter. These bonds represented 27.3% of the total debt securities as of June 30, compared to 30.7% at the end of 2021. Short-term bonds, or those repricing in less than three years, represented 25.7% of the total debt securities portfolio at the end of the second quarter, compared to 21.0% two years ago.
Total debt securities exposure at the Big Four US banks represented 40.5% of the industry's total debt securities as of June 30. Bank of America NA remained on top with $723.90 billion in total debt securities, down $39.72 billion from the first quarter. The drop in balances was a result of "paydowns from the held-to-maturity and sales of available-for-sale securities."
Alastair Borthwick, CFO at Bank of America, said during the second-quarter earnings call, "Securities book has seen a steady decline since the fall of 2021 when we stopped adding to it. With less loan funding needs, proceeds from security paydowns have been deployed into higher-yielding cash. And through this action and the increased cash rates, the combined cash and security yield has risen further and faster than deposit rates."
Only three banks among the top 20 by total debt securities — JPMorgan Chase Bank NA, U.S. Bank NA and Northern Trust Co. — reported a quarter-over-quarter increase in debt securities.
JPMorgan Chase & Co. assumed substantially all of the deposits and purchased essentially all of the assets of First Republic Bank on May 1, while MUFG Union Bank NA transferred its assets to one or more institutions including U.S. Bank on May 27. U.S. Bancorp completed its acquisition of MUFG Bank NA on Dec. 1, 2022, however, the bank continued to file separate call reports until the first quarter of 2023.
No rush in changing the game plan
The Federal Reserve is expected to be at or near its terminal rate for the benchmark fed funds rate. While some bank managers could see that as an opportunity to extend duration in the bond portfolios, most institutions likely will be reticent to invest in longer-term bonds until liquidity concerns are left in the rearview mirror and deposit competition eases. Deposit outflows slowed in the second quarter but liquidity pressures persisted in the period.
Securities at commercial banks have declined 7.2% year to date through Aug. 23, according to seasonally adjusted data in the Federal Reserve's most recent H.8 report on bank assets and liabilities. On the other hand, deposits have declined modestly by 2.2% since the start of this year but have increased by 0.3% since the end of the first quarter.