Chart of the week: US balance sheets contract

Summary: US banks’ falling holdings of risk assets could mean trouble

What the chart shows: The chart shows US commercial banks’ holdings of Treasury and Agency securities

Why is the chart important: Two common themes in the aftermath of the Great Recession have been politicians attempting to make banks safer by mandating higher capital ratios; and also attempting to make banks lend more. These are generally mutually contradictory. Current US developments are a case in point. US banks have in the past stocked up on ‘safe’ assets in the form of Treasury and Agency bonds. But, recently, their bond holdings have shrunk, partly because of higher interest rates, which push down the value of bonds. At the same time, banks have been discouraged from buying ‘risk’ assets. Instead, the Fed’s QE enabled banks to pile into cash. But now the Fed is poised to turn off the cash tap. This could threaten current healthy broad money growth; and potentially derail the US recovery.