Growing assets differs in FIG? (Jeffrey Epstein interview)
I was watching the Jeffrey Epstein interview where he explained bank accounting and made a point that stuck with me (in verbatim): "When a bank doubles its assets, it doesn’t mean the bank now has twice as much money. It usually means people now owe the bank twice as much money"
This is the opposite of how non-FIG businesses work, like growing assets means more cash, inventory, and property. If you're analyzing a bank report strong asset growth (especially loan growth), how do you distinguish between "healthy, high-quality growth" vs. "risky, yield-chasing growth that could blow up later"? Are banks that are shrinking their balance sheets actually sending a better signal than those aggressively growing assets? thanks
When analyzing asset growth in FIG (Financial Institutions Group), it's crucial to understand that banks operate differently from non-FIG businesses. For banks, asset growth often reflects an increase in loans (assets on their balance sheet), which means more people or businesses owe the bank money. Here's how to distinguish between "healthy" and "risky" growth:
Healthy, High-Quality Growth
Risky, Yield-Chasing Growth
Shrinking Balance Sheets
Banks shrinking their balance sheets are not necessarily signaling weakness. In some cases, it can indicate: - De-risking: Reducing exposure to risky loans or sectors. - Focus on Efficiency: Prioritizing profitability over growth, especially if the bank is not earning its cost of capital. - Market Conditions: Adjusting to economic or regulatory changes that make aggressive growth less viable.
However, shrinking assets could also signal trouble if it results from forced deleveraging due to capital or liquidity constraints.
Key Takeaway
Strong asset growth in banks is not inherently good or bad—it depends on the quality of the growth. A thorough CAMELS analysis (Capital, Asset Quality, Management, Earnings, Liquidity, Sensitivity to Markets) can help you assess whether the growth is sustainable or risky.
Sources: Evaluating Commercial Banks (part 1 of ??), Working in FIG (Financial Institutions Group) - An Overview., Evaluating Commercial Banks - Earnings (part 2), How to tell if a bank will fail?
High quality asset growth with limited non performing assets (low NCO/loans & NPAs/Assets) is key. Yes, having a rapidly growing balance sheet can be a negative if the loans are crap, but if you have good asset quality then the growth is good.
Unless a bank is consolidating its balance sheet to higher yielding assets, balance sheet shrinkage is also a bad thing. You want a large breadth of loans in a bank (across industries and income levels for consumer facing loans) and shrinkage can expose a bank to Industry specific risks.
The only ways a bank can increase EPS is by charging higher interest above market (implying higher risk), pay less in deposits (which can cause funding to run) or to grow assets through lending, which allows for diversification without sacrificing yield when lending into C&I across multiple industries, for example. My $0.02
It’s not that complicated at least from a banking depository perspective. Banks grow their assets by growing their loan book. They grow their liabilities by growing their amount of deposits because they owe their depositors interest (ex. on a savings account).
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