The share of riskless assets at US banks continued to increase in the first quarter, rising to 31.6% – the highest level in two years.

The shift was starkest at Western Alliance, where assets attracting 0% risk-weighting under the standardised approach to credit risk doubled to $13.3 billion, pushing its share up by nine percentage points to an all-time high of 20.4%.

Overall, 25 of 29 banks analysed by Risk Quantum reported a higher proportion of assets that encumber no capital. 

State Street added $37.3 billion, a 25.6% rise that grew its share by the second most of the group, reaching a record 66.2%. Synchrony’s share was up by the third most, following a 35.7% increase in risk-free assets, followed by Regions Bank with a 37.9% uptick.

Small and medium-sized US banks – those with assets of between $100 billion and $750 billion – reported the biggest rises, increasing their aggregate share of riskless assets by 1.1pp to 19.7%. In contrast, the eight global systemically important banks saw a 0.75pp increase to 37.4%. Both figures represent two-year highs, as does the aggregate figure for the full sample of 31.6%, up 0.9pp.

Four banks bucked the trend by decreasing their share of riskless assets: Comerica by 3.4pp to 15.9%; First Citizens by 1.1pp to 22.9%; JP Morgan by 1pp to 38.3% and Charles Schwab by 0.9pp to 33.8%.

The total increase in riskless assets – 3.6% in absolute terms – coincided with slight declines in other risk-weighting buckets. Across the 29 banks, assets in the 100%, 50% and 20% buckets dropped by 0.8%, 0.2% and 1.7%, respectively.

As a result of this shift, the average risk-weighting of exposures at US banks fell to 51.3% on aggregate, down from 51.6% three months earlier.

What is it?

The standardised approach to credit risk, as defined by the Basel Committee on Banking Supervision, assigns credit exposures to risk-weight buckets. The allocation depends on the nature of the exposure and the counterparty, their credit rating and other metrics, such as mortgages’ loan-to-value ratio.

The buckets range from 0%, which entails no capital requirements, to 1,250%, which necessitates a dollar of capital for each dollar of exposure. Capital requirements are set at 8% of risk-weighted assets, meaning assets in the 100% risk-weighting bucket require eight cents of capital for every dollar of exposure.

Assets deemed riskless include cash, highly rated sovereign debt such as US Treasuries and exposures to institutions such as the International Monetary Fund.

Although some US banks have received regulatory approval to adopt internal models, they are still required to determine the exposures’ allocation under the standardised approach by submitting quarterly FR Y-9C filings to the Federal Reserve.

Why it matters

The increased appetite for riskless assets builds on a resurgence seen in the last three months of 2023, a trend driven largely by the eight systemic banks. The growth of the past six months has reversed the decline in no-risk exposures observed earlier last year.

Historically, the desire for low-risk exposures has surged in times of uncertainty, notably the early months of the Covid-19 pandemic and the 2023 banking crisis. The current rise suggests a reduction in US banks’ risk appetite.

The breadth of this trend is also notable: 25 banks increased their share of riskless assets in the first quarter, exceeding the 22 and 24 that did so in the first two quarters of 2020, respectively, when holdings of riskless assets saw significant growth. While the latest figures are not as dramatic, they indicate a broad consensus among US banks in favour of reducing credit risk.

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Currently, the available data covers more than 120 banks and over 350 metrics, but we’ll be adding more throughout the year. The Risk Quantum database can be accessed here. The full list of data points currently available can be found at this page. The full range of banks covered can be viewed here.

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