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/ hold-to-maturity portfolios or has taken on aggressive hedging can affect the ratings through our business and risk position assessments," Plesser wrote. Meanwhile, the Federal Reserve recently finalized new regulations on capital and leverage that make securities holdings such as a AFS portfolios an element of bank capital ratios That move will likely result in increased volatility of regulatory ratios, according to Plesser's 2012 report. Volatility in regulatory capital ratios could be a rude surprise for the ordinary bank shareholder, given the Fed's annual stress testing process and its authorization of dividends and share buybacks. As the nation's largest banks attempt to win back investors in the wake of the financial crisis, differing treatment of assets between lenders could also continue to muddle the earnings of the industry. Level 3 assets got the most press when David Einhorn of Greenlight Capital questioned whether Lehman Brothers was improperly marking and moving its assets. While Lehman is now defunct and the worst Level 3 assets such as CDO squareds, synthetic mortgage derivatives and equity tranches of structured products are no longer on bank balance sheets, investor uncertainty remains. Some bank analysts and hedge fund investors like Bill Ackman of Pershing Square Capital Management continue to characterize the nation's largest banks as uninvestible.