There's More to Liquidity Than Just Cash on Hand

The amount of cash in a bank's coffers is one sign of liquidity, but in many cases it does more to indicate the nature of the bank.

Money-center banks tend to have lots of cash. However, they also rely heavily on purchased funds that institutional customers can withdraw if the bank's credit quality drops.

Regional banks tend to have lower cash balances, but they do not rely as heavily on less stable purchased funds.

This contrast came to light in a recent study of cash and deposit balances conducted by Weiss Research, a consumer-oriented bank rating agency.

Cash-Poor in California

Weiss measured bank's cash and cash equivalents as a percentage of their deposits and other short-term liabilities as of March 31. And on that scale, three of the four superregional banks in California came up short.

Wells Fargo & Co.'s lead bank had a liquidity ratio of just 8% at the end of the first quarter, the Weiss report said. Security Pacific Corp's lead bank had a ratio of just 18.4%, and Bank-America Corp.'s main subsidiary had a liquidity ratio of 22.7%.

The numbers show that "some of the largest banks are not necessarily the strongest," according to Michael Silverman, a spokesman for Weiss.

But officials at the California banks dispute that finding.

"There's no question that one part of liquidity is assets you can easily dispose of," like cash and cash equivalents, said John F. Kooken, chief financial officer of Security Pacific.

But having lots of deposits - a condition that would reduce a bank's liquidity ratio as defined by Weiss - also affects the calculation.

"In the California banks, one of the things that enhances our liquidity is the fact that a very high proportion of our funding comes from core deposits, and by all history core deposits are very stable." He said Bank-America lost almost none of its deposit base even when it was most troubled in the mid-1980s.

Some Score High

Several money-center banks, including J.P. Morgan & Co. and Bankers Trust New York Corp., scored high on the Weiss scale. But that is to be expected, said Mara Hilderman, a senior bank analyst at Moody's Investors Service Inc.

"Morgan and Bankers Trust are very properly structured," she said. "Right now they have no problems accessing the purchased funds market. But if they did have a crisis, they would have the ability to sell the marketable securities and pay off the purchased funds."

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