The banking industry's appetite for municipal debt has been on the rise, but it's mostly small institutions that are doing the splurging, leaving the typical small bank with a far bigger allocation to munis then the typical large bank.

Since 2008, when the Federal Reserve lowered its policy rate to close to zero, munis have grown by a percentage point to make up about 8.4 percent of total securities owned by banks. That's still just a small slice of the aggregate bond portfolio for an industry that has traditionally favored securities with federal backing-particularly mortgage bonds-but the median ratio of munis to total securities has nearly doubled, to 20.6 percent, reflecting the fact that many banks are piling in.

No doubt they are pushing further into a securities class whose outlook largely depends on its tax treatment, a matter of considerable uncertainty because of partisan warfare over the federal budget. But the presence of ample funding and the search for yield are powerful forces in portfolio management.

Reflecting the structure of an industry populated mostly by little institutions but where assets are heavily concentrated among the largest, the median ratio for banks with less than $10 billion of assets tracks closely with the median ratio for the industry as a whole.

Among banks with more than $10 billion of assets, however, the median ratio of munis to securities was just 3.3 percent at Sept. 30. That is a notable increase from the 1.7 percent seen at the end of 2008, but remains well below the aggregate ratio of 5.2 percent for the asset-size class. Some bigger banks, like Cullen/Frost, Wells Fargo and Zions, have unusually large muni portfolios, plumping the aggregate ratio for the group. At Frost Bank, the principal subsidiary of Cullen/Frost, munis have ticked up in the last two quarters to account for 30.1 percent of total securities, but remain below levels seen at the end of 2009 and 2010.

Overall, the shift in portfolio weightings has lifted banks' share of total muni debt outstanding by 3 percentage points since 2008 to 9.4 percent at Sept. 30, overtaking the share held by money market funds. The inversion mirrors the torrent of cash that has abandoned money funds-more than $1 trillion since 2008-and materialized in deposit accounts, rerouting the capital available to fund municipalities. (Households are still the largest investors in muni debt by far, with about 47 percent, or $1.8 trillion, of the market at Sept. 30.)

To be sure, most banks with large muni portfolios have long been investors in the securities. Of the 3,600 banks where munis accounted for more than 20 percent of total securities at Sept. 30, about 2,000 also had more than a fifth of their bond portfolios in munis at the end of 2005. About 600 of the banks had a larger portion of their bond portfolio allocated to munis then than they do now.


For related data, including an interactive look at securities allocations over time for some of the industry's largest muni holders, click the data tab of and search "muni."

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