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KBRA Analytics Releases The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show
[June 22, 2022]

KBRA Analytics Releases The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show

KBRA Analytics releases this month's edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show.

This month's newsletter reports on bank treasury strategy to manage through the current interest rate volatility and protect capital from mark-to-market accounting by booking bonds in held-to-maturity (HTM) accounts instead of available-for-sale (AFS). Though some bank treasurers dismiss the accounting (with the exception of the largest banks, which must include unrealized gains and losses in regulatory capital), most institutions are concerned enough for some to hold as much as half of their bond portfolios locked up in HTM, which does not allow for the sale of securities for routine asset-liability management activities, including to take gains or for liquidity purposes. Accumulated other comprehensive income (AOCI) plunged to a negative 8% of the industry's Tier 1 leverage capital, lower than it fell even in Q4 2008.

Dismissive of the lopsided accounting, the newsletter reports on how non-maturity deposits increased significantly in the mix of total balance sheet funding, accounting for 70% in Q1 2022 compared to 42% in Q4 2008. The piece also evaluates how future bank earnings should benefit from the Fed's hawkish turn, provided it does not send the economy into a sharp recession leading to credit losses. Quoting senior bank managers speaking to analysts this month, the newsletter discusses the industry's general optimism for the economy. This is a perspective that has filtered into credit reserves and helps explain why large public banks following current expected credit loss (CECL) standards have aggressively reduced their credit allowance to 1.5% by the end of Q1 2022 from 2.6% of total loans at the height of pandemic lockdowns in 2020.

The Bank Treasury Chart Deck opens by highlighting the surge in loan growth that narrowed the overhang of deposits in the system by $500 billion down to $6.9 trillion-an overhang that is still twice as large as it was before COVID. The chart deck then shifts to showing ow the increased mix of core deposit funding combined with the previous 0% rate regime led banks to reduce their reliance on wholesale funding sources, including Federal Home Loan Banks (FHLB) advances and brokered deposits. It also increased balance sheet asset sensitivity, positioning the industry to profit in the current rate-hiking regime. The deck later shows how the expansion of the Fed's overnight reverse repo facility (RRP) to $2.3 trillion, coupled with the increase in the rate paid for the RRP to 1.55% from 0.80%, increased cash supply into the overnight repo market and sent the Secured Overnight Financing Rate (SOFR) down to 1.45%. Another slide profiles the Treasury General Account, which is a factor behind bank reserves currently standing at $3.3 trillion. The chart deck concludes by looking at the 2s-10s Treasury spread, which has narrowed to less than 10 basis points (bps) since the Fed's 75-bp hike this month.

In Bank Talk: The After-Show, with quantitative tightening (QT) underway, Van Hesser and Ethan Heisler assess the potential impact on bank deposit levels. Ethan explains that deposits not only grew through the last QT, but they also, remarkably, were not noticeably impacted by the sharp reduction in Fed reserves that has already taken place since the new year. Looking at trends state-by-state, Ethan and Van discuss why regional/community banks in Texas led the nation in deposit growth, and also how strong deposit growth was a nationwide phenomenon. Offering more statistics, the duo observe that regional/community banks recorded 10% growth in deposits from June 30, 2021, through March 31-roughly equivalent to the growth rated reported by larger national banking franchises.

Click below to view the reports:

About KBRA Analytics

KBRA Analytics, LLC (KBRA Analytics) is our premier product platform for high quality data and advanced analytics. Our seasoned teams of industry specialists across each product provide unparalleled insight creating a foundation of deeper analysis and rapid discovery for users. KBRA Analytics is an affiliate of Kroll Bond Rating Agency, LLC (KBRA). KBRA is a full-service credit rating agency registered in the U.S., designated to provide structured finance ratings in Canada, and with credit rating affiliates registered in the EU and UK.

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