Understanding US Bank Assets and Liabilities
The US banking industry has more than 4,000 FDIC-insured banks that play a crucial role in the country’s economy by securely storing deposits and providing credit in the form of loans.
This infographic visualizes all of the deposits, loans, and other assets and liabilities that make up the collective balance sheet of U.S. banks using data from the Federal Reserve.
With the spotlight on the banking industry after the Signature Bank collapses, Bank of Silicon Valleyand First Republic Bank, understanding the assets and liabilities that make up banks’ balance sheets can provide insight into how they operate and why they sometimes fail.
Assets: the building blocks of bank activity
Assets are the foundation of a bank’s operations, serving as the basis for providing loans and credit while generating income.
A healthy asset portfolio with a mix of long-term and short-term loans and securities is essential for a bank’s financial stability, especially since non-marked-to-market assets may be worth less than provided if they are liquidated early.
ℹ️ mark-to-market means that current market prices are used to value an asset or a liability in a balance sheet. If the securities are not marked to market, their value may be different when liquidated.
In the fourth quarter of 2022, US banks were generating an average interest income of 4.54% on all assets.
Loans and leases
Loans and leases are the main income-generating assets for banks, accounting for 53% of assets held by US banks.
- Home loans for residential and commercial properties (45% of all loans and leases)
- Commercial and industrial loans for business transactions (23% of all loans and leases)
- Consumer loans for personal needs like credit cards and car loans (15% of all loans and leases)
- Various other types of credit (17% of all loans and leases)
Securities make up the second largest portion of US bank assets (23%) at $5.2 trillion. Banks mainly invest in Treasury and agency securitieswhich are debt securities issued by the US government and its agencies.
These titles can be classified into three types:
- Held-to-maturity (HTM) securities, which are held to maturity and provide a steady stream of income
- Available for sale (AFS) securities, which can be sold before maturity
- Securities tradingheld for short-term trading to take advantage of price fluctuations
In addition to Treasury and agency securities which make up the vast majority (80%) of US bank securities, banks also invest in other titles which are non-government debt securities such as corporate bonds, mortgage-backed securities and asset-backed securities.
Cash is a small but essential part of US bank balance sheets, accounting for $3.1 trillion or 13% of all assets. Having sufficient liquidity ensures adequate liquidity needed to meet short-term obligations and regulatory requirements.
Cash includes physical currency held in bank vaults, pending collections, and cash balances in accounts with other banks.
Liabilities: financial obligations of banks
Liabilities represent the obligations that banks have to fulfill, including customer deposits and loans. Prudent liability management is essential to maintain liquidity, manage risk and ensure a bank’s overall solvency.
Deposits constitute the largest part of the liabilities of banks because they represent the money that customers entrust to these institutions. It is important to note that the The FDIC assures deposit accounts up to $250,000 per depositor, per insured bank, for each type of account (such as single accounts, joint accounts and retirement accounts).
There are two main types of deposits, large time deposits And other deposits. Large term deposits are defined by the FDIC as term deposits greater than $100,000, while other deposits include checking accounts, savings accounts, and small term deposits.
U.S. banks had $17.18 trillion in aggregate deposits as of April 12, 2023, with other deposits representing 74% of aggregate liabilities while large term deposits representing 9%.
After deposits, borrowings are the second-largest liability on U.S. banks’ balance sheets, accounting for nearly 12% of all liabilities at $2.4 trillion.
These include short-term borrowings from other banks or financial institutions such as Federal Funds And repurchase agreementsas well as long-term loans such as subordinated debt which ranks below other loans and securities in the event of default.
How Deposits, Rates, and Balance Sheets Affect Bank Failures
Like any other business, banks need to balance their finances to stay solvent; however, the success of banking also depends heavily on depositor confidence.
While in other businesses an erosion of trust with customers can lead to disruptions in future business transactions and revenue, it is only in banking that a loss of customer trust can quickly turn into an immediate removal of deposits that supports all revenue-generating opportunities.
Although recent bank failures are not only due to withdrawals of funds from depositors, bank runs have played an important role. More recently, in the case of the First Republic, depositors withdrew more than $101 billion in the first quarter of 2023, which would have represented more than 50% of their total deposits, if some of the largest American banks had not injected $30 billion in deposits on March 16.
It is important to remember that rapidly spreading bank run fires are initially ignited by poor asset management, which can sometimes be detected in banks’ balance sheets.
A combination of excessive investments in held-to-maturity securities, one of the fastest touring cycles in recent history, and many depositors fearing and moving their uninsured deposits over $250,000 resulted in the worst year on record for bank failures in terms of total assets.