Standard & Poor's made headlines last July when it reported that Wells Fargo, Warren Buffett's top bank holding, held the highest percentage among large banks of Level 3 assets in its securities portfolio.
S&P credit analyst Stuart Plesser noted lenders such as JPMorgan, Wells Fargo, Citigroup and PNC Financial had used surging inflows of deposits to load up on securities and hard-to-value Level 3 assets as a means of supporting their earnings amid weak lending activity.
Riskier assets often carry high yields and it's not just banks that are buying them. Hedge fund and private equity investors in the market for CLO's expect gains as distressed prices and wide credit spreads dissipate in an economic recovery.
Plesser calculated banks had nearly doubled their investment portfolios to about $900 billion since 2009, and highlighted Wells Fargo as holding the highest percentage of Level 3 assets in its securities portfolio at 14.5%. Wells Fargo was followed by PNC Financial and JPMorgan, which respectively counted Level 3 assets as 13.6% and 6.8% of their overall portfolios.After a first quarter shift of assets by JPMorgan and Wells Fargo and few similar movements by Citigroup, PNC and Bank of America, the numbers have changed. Level of Concern Eases as Level 3 Assets Become Level 2. Bank investors should care about the shifting characterization of assets, even if the Level 3 imprimatur on a balance sheet isn't the red flag it was during the financial crisis. Plesser of S&P noted in his July 2012 report that the ratings agency considers the amount of Level 3 assets a bank holds in its so-called risk adjusted capital formulas, a crucial component of its credit rating methodology. "Evidence that a bank has increased the risk composition of its corporate segment and AFS/
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