Off-balance-sheet exposures at US systemic banks jump $67bn

BAML expands these assets by 2.5% quarter-on-quarter to $921 billion

Off-balance-sheet assets climbed to $4.27 trillion at the eight US global systemically important banks in Q2, up nearly 2% on the previous quarter.

Bank of America Merrill Lynch built up these exposures by the most of the group, adding $22.7 billion (2.5%) on Q1 to total $921 billion.

JP Morgan followed suit, increasing assets by $17.6 billion (1.6%) to $1.13 trillion on the quarter, while Citi added $10.7 billion (0.9%) to reach $1.16 trillion.

Wells Fargo saw off-balance-sheet exposures climb by $8.1 billion (1.3%) to $645 billion, Goldman Sachs by $5.7 billion (3.8%) to $157 billion, Morgan Stanley by $3.1 billion (2%) to $162 billion, and State Street by $94 million (0.25%) to $38 billion.

In contrast, BNY Mellon reported lower exposures on the quarter prior, down $1.1 billion (2%) to $54 billion.

Off-balance-sheet items accounted for 9.7% of the banks’ aggregate leverage exposure, once adjustments for conversion to credit-equivalent amounts were taken into account. Citi had the largest share of its total leverage exposure made up of these items, at 12.4%, and BNY Mellon the smallest, at 5.5%.

What is it?

US banks report the gross notional amount of their off-balance-sheet exposures as part of their quarterly supplementary leverage ratio (SLR) disclosures. This is calculated as the average of the amount outstanding on the last day of each of the three months of the preceding quarter. Excluded are off-balance-sheet exposures related to repurchase agreements and derivatives, which are reported separately. 

According to the Federal Reserve, off-balance-sheet exposures include commitments, guarantees, and those special-purpose vehicles and securitisations that are not consolidated on banks’ balance sheets. 

The gross notional amounts are adjusted for conversion to credit-equivalent amounts. The resulting figure is added to on-balance-sheet, repo and derivatives exposures to generate a bank’s total leverage exposure.

Why it matters

Over the past two years, gross notional amounts of off-balance-sheet exposures at the G-Sibs have yo-yoed with surprising regularity – building up over the first nine months of each year and dropping lower in the last quarter.

One reason for this pattern is the effect of regulatory pressures that make themselves felt in December. Regulators take a snapshot of banks’ balance sheets at the year-end to use as a starting point for annual stress tests and also use them to set systemic risk capital requirements.

This incentivises them to tidy up their assets and reduce leverage exposures towards the end of each year.

It could be that it’s easier for banks to expand and contract off-balance-sheet assets quickly, as the gross notional amounts refer to the total values of credit lines and liquidity facilities, which can be dialled higher or lower when banks negotiate their terms with clients.

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