Optimising Commercial Banks’ Treasury Securities Portfolios: An Empirical Study on Key Variables and Average Maturity

Recent reforms in the United States (U.S.) to strengthen the resilience of financial institutions mandated greater allocation to Treasury holdings, enhancing liquidity and capital adequacy. This study examines factors that US banks consider when optimising treasury securities portfolios and managing risks, while conforming to regulatory liquidity and capital requirements. These factors were derived from quarterly Call Reports filed by U.S. commercial banks with the Federal Financial Institutions Examination Council. The analysis used a modified two-factor asset pricing model for bonds, with average maturity and default risk as the main factors. The study found that the 30-day Treasury bill rate influences the average maturity of U.S. banks’ Treasury securities portfolios, whereas the 10-year Treasury bond yield, the Tier 1 capital adequacy ratio, and the Treasury securities-to-total assets ratio exert negative effects. Regarding portfolio performance, the bond market term risk premium (TERM) and average maturity emerge as the primary drivers of excess returns. Tier 1 capital adequacy ratio and the treasury securities-to-assets ratio also significantly influence excess returns, while the default risk premium is significant only in the post-GFC period, reflecting heightened credit risk during financial stress. Tier 1 leverage capital ratio is found to have no impact on excess returns in banks’ treasury securities portfolios. This study and its findings can help avoid divergent behaviours among banks. Additionally, we urge banks to reevaluate ethical and strategic priorities for profitability rather than relying on regulatory adjustments. Though centred on the U.S., the study's insights are relevant to other markets.