Meredith Whitney’s warnings about a wave of municipal bankruptcies two years ago didn’t kill munis, nor did Orange County’s 1994 bankruptcy, but will ending their tax-exempt status push these securities, or at least those who own them, over the fiscal cliff?
It is not known what the White House and Republican leaders will ultimately decide in talks that have included the idea of limiting the tax-deductibility of municipal bond interest.
But a new report by SNL Securities suggests that such a move could potentially deal a blow to many banks that have increased their holdings of these bonds over the last three years in their quest for higher yield in a low-interest-rate environment.
Bank and thrift holdings of municipal securities have grown to more than 20% of assets from just over 15% only three years ago, SNL’s report shows. Wells Fargo tops the list of muni assets, with $38 billion in its portfolio. Adding in JPMorgan Chase, Citigroup and MetLife brings total muni exposure to $95 billion for the four banks that hold the most munis.
But these are all financial institutions whose large size and asset diversification could presumably cushion the hit to their portfolios. Far more is at stake for smaller financial institutions that have bet heavily on munis.
Indeed, SNL’s list includes two institutions – financial holding company Cass Information Systems and Depository Trust Co. – whose securities portfolio is 100% invested in munis.