The American banking sector has recently been in the spotlight, which is not surprising given the recent collapses of Silicon Valley Bank and Signature Bank, as well as the failure of First Republic Bank that marked the beginning of the week. Therefore, it is important to examine the assets and liabilities of American banks as they can provide insight into how they operate and why they sometimes fail.
Visual Capitalist has compiled an overview of deposits, loans, and other assets and liabilities that make up the common balance sheet of banks in the U.S. using data from the Federal Reserve. According to their data, the American banking sector has more than 4,000 banks insured by the federal regulator FDIC, which play a key role in the country’s economy by safely storing deposits and providing loans in the form of credit.
Assets and Liabilities of American Banks
According to their data, the total assets of American banks, which are the foundation of each bank’s operations and serve as the basis for providing loans and credit and generating income, amount to $22.9 trillion. A healthy asset portfolio with a combination of loans along with long-term and short-term securities is crucial for the financial stability of a bank, especially since assets that are not marked to market may have a lower value than expected if liquidated early. Since the fourth quarter of 2022, American banks have achieved an average interest income of 4.54 percent on all assets.
When it comes to loans and leasing, which are the primary assets for generating income for banks, they account for 53 percent of the assets held by banks in the U.S. and exceed $12 trillion. This includes: loans for residential and commercial real estate, which make up 45 percent of all loans and leases; commercial and industrial loans for businesses, which are 23 percent of all loans and leases; consumer loans for personal needs (such as credit cards and auto loans), which account for 15 percent; and other types of loans, which total 17 percent.
Securities make up the next largest portion of the assets of American banks – nearly a quarter, or 23 percent, with $5.2 trillion. Banks primarily invest in treasury and agency securities, which are debt instruments issued by the U.S. government and its agencies.
Cash and cash equivalents are a small but essential part of the balance sheet of American banks, accounting for 13 percent of total assets with $3.1 trillion, and holding sufficient cash ensures adequate liquidity necessary to meet short-term obligations and regulatory requirements.
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On the other hand, banks must manage liabilities as this is crucial for maintaining liquidity, managing risk, and ensuring the overall solvency of the bank, which in American banks amounts to $20.7 trillion, according to Visual Capitalist.
When it comes to deposits, which make up the largest part of the banks’ liabilities as they represent the money that clients entrust to these institutions, banks in the U.S. had $17.18 trillion in total deposits as of April 12, 2023, with other deposits accounting for 74 percent of total liabilities, while large time deposits made up 9 percent.
After deposits, borrowings are the next largest liability on the balance sheet of American banks, accounting for nearly 12 percent of all liabilities. This includes short-term loans from other banks or financial institutions, such as federal funds and repurchase agreements, along with long-term loans, such as subordinated debt that ranks below other loans and securities in the event of default. They total $2.4 trillion.
Balance is Essential
So why is all this important? Like any other business, banks must balance their finances to remain solvent. However, successful banking also heavily relies on the trust of depositors, and while in other businesses, the erosion of customer trust can lead to failures in future business dealings and revenues, only in banking can the loss of customer trust quickly turn into an immediate withdrawal of deposits that support all revenue-generating opportunities.
Although the recent bank collapses did not occur solely due to withdrawals of depositor funds, it did play a role. In the case of First Republic Bank, depositors withdrew more than $101 billion in the first quarter of 2023, which would be more than 50 percent of their total deposits had a consortium of banks not injected $30 billion into the bank’s deposits in mid-March. Such ‘rapidly spreading fires’ in banks were initially triggered by poor asset management, which can sometimes be revealed in banks’ balance sheets.
A combination of excessive investment in long-term securities held to maturity, one of the fastest cycles of interest rate increases in recent history, and the fear of many depositors for their uninsured deposits over $250,000 and their relocation, resulted in the worst year ever for bank failures in terms of total assets, according to Visual Capitalist.
