Banks Dump Securities

Commercial banks have been allocating a disproportionate amount of their credit extensions (about 25% of their $12.4 trillion of assets) in securities. They ostensibly were more interested in earning a return on securities than dabbling in new lending.

However, last week things were different. Banks sold securities in size, possibly looking to take profits, which optimists would hope is a precursor to (gulp) lending. It certainly would make sense now that the Fed is looking to punish those who would hold cash.

In the week ended Dec. 10, banks held $2.758 trillion of securities, a $45 billion decrease from the previous week, representing about a third of the increase in cash holdings held by banks in the same week. These data can be erratic and the trend on securities purchases has been up in recent months, so it is far too soon to say that banks are shifting from securities purchases to lending.

Nevertheless, the Fed's curse on cash and the sharply lower returns available on securities are good preconditions for an increase in bank lending.

I mentioned earlier that banks were for the first time sitting on over $1 trillion of cash balances. Banks have been accumulating cash for about three months, with cash balances moving up a massive $700 billion during that time.

ALL TONY CRESCENZI BLOG ENTRIES | POST A COMMENT | READ COMMENTS  

---

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.