Flush With Cash, Big Banks Still Issue Record Debt

Banks Issued $314 Billion in Debt in 2021

Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM), and Bank of America (BAC) are among the big banks bulking up on debt, despite having record cash levels. So far in 2021, the country’s six biggest lenders issued $314 billion in debt, the largest annual amount since 2008. Since Goldman, Morgan Stanley, and Bank of America released third-quarter results earlier this month, all three have sold bonds.

Banks’ desire to issue new debt is lifting the corporate bond market, which has been slowing down compared to last year’s pandemic-fueled growth. This year, banks are responsible for over one third of US investment-grade debt issued—a record for large banks.

Banks Need Long-Term Debt to Meet Requirements

Bulking up on debt may not seem to make much sense given that banks are flush with cash at the moment, collecting trillions of dollars in deposits since the pandemic’s onset in March 2020. But deposits are only one aspect of the big banks’ business models. They also need to hold long-term debt on their liabilities to meet regulatory requirements. That can diverge when deposits grow, prompting banks to issue more debt to close the gap.

The requirement that long-term debt be part of banks’ liabilities was put on the books after the financial crisis of 2008 and 2009. The thinking is if banks have long-term debt it will cushion the impact from panic in the short-term debt markets.

Debt May Boost Profits

By issuing debt, banks can also lock in cheap borrowing costs for a long period of time. Should interest rates increase and lending improve, it could boost banks’ profits. For now, loan demand remains weak, with consumers using extra pandemic money to reduce their debt and save more.

Goldman Sachs and Morgan Stanley, which do not have large bank deposit businesses, have been issuing debt to fund growth. The debt proceeds are going to boost the Wall Street banks’ equity and fixed-income financing units. Big banks are flush with cash at the same time that they are issuing record debt. It will be interesting to see how the strategy benefits them in the quarters to come.

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ABOUT Meg Richardson Meg Richardson is a writer specializing in markets, technology, and personal finance. She loves breaking down seemingly complex ideas and making them readable and interesting for everyone. She holds an MFA in writing from Columbia University. When she is not writing about finance, she enjoys running in Central Park and drawing cartoons.

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