Nearly one year into the COVID-19 pandemic and economic collapse, let’s see how Small (SCB) Commercial Banks and Large (LCB) Commercial Banks have been using their balance sheet. The balance sheet changes reflect a variety of actions by customers, regulatory agencies, Congress and the Administration and bank management.

The data is from the weekly FRB H.8 Report. LCBs for this report are the largest twenty-five (25) commercial banks. The remainder (~5,000) are broadly designated as SCBs here.

Small Commercial Banks: Total Assets expanded by approximately $1 trillion, or 18%. On balance sheet loans grew $343 billion with the Payroll Protection Program (PPP) loans representing a substantial factor (through end of 2020, banks under $50 billion in total assets made $333 billion in PPP loans, according to the SBA). The Small Bank group held $111 billion more in agency MBS, continuing a trend favoring holdings of MBS over whole loans. Small Banks added $94 billion in other securities (i.e., not agency MBS or U.S. Treasuries). And the largest increase was in Cash, totaling $419 billion, to augment on balance sheet liquidity; comparable to their experience during the 2008-2009 Great Recession. Most of these cash balances were held at various Federal Reserve banks as excess reserves.

Large Commercial Banks (25 largest banks): Total Assets increased by $1.8 trillion, or 17%. Loans decreased by a net $(76) billion with declines in credit card, residential mortgages and C&I loans. This Large Bank group held $355 billion more in agency MBS, continuing a longer term trend favoring MBS over whole loans. Large Banks added $367 billion in U.S. Treasuries, in part to support collateral requirements relating to certain customer deposit inflows. As with SCBs, the largest increase for LCBs was in Cash, totaling $936 billion, to augment liquidity and comparable to their experience during the 2008-2009 Great Recession. Again most of these cash balances were held as excess reserves at various Federal Reserve banks.

Loans as % of Balance Sheet: Both Large Banks and Small Banks showed a decline in the ratio of total loans as a percent of total assets - comparable to that experienced during the Great Recession; but deeper for the Large Bank group. The simple conclusion that lending declined or slowed is not the full explanation. The cause for the decline in this ratio is more complex. Investment securities as percent of total assets are rising. With mortgage originations surging during this period of record low mortgage rates, whole loan originations are being sold into the secondary market and agency MBS (classified as Investments rather than loans) - much obtained directly through single-family lender swaps with Fannie Mae and Freddie Mac - are added to the balance sheet. Liquidity and risk-based capital objectives are driving this long term trend. Depositors are moving funds back into the banking system at rates much faster than loan demand can utilize these funds. And some of this deposit flow at Large Banks requires collateral; resulting in the expansion in holdings of U.S. Treasury securities. Cash holdings have risen as a liquidity response during this crisis and to meet LCR regulatory requirements for those large banks. And loan demand may have fallen off in certain categories - large customers taking advantage of low interest rates and a receptive corporate bond market and consumers paying down credit card balances- as well as lending terms may have tightened in other categories.

Cash as % of Balance Sheet: Banks across all sizes have elevated their cash balances as percent of total assets. This elevation started during the Great Recession and as bank regulators implemented new liquidity regulations and supervisory guidance and expectations. Year over year, Large Banks nearly doubled the percentage of total assets held in cash to 14.4%. Even the Small Bank group nearly doubled to 11.7%. Much of this cash is held as excess reserves at Federal Reserve banks.