Causes of the recent increase in bank security holdings

While bank security holdings have increased sharply in recent years, there is widespread disagreement about the significance of the increase. Some analysts argue that the increase is not a cause for concern because it results from temporary factors such as the business cycle. Others argue that the increase represents a permanent shift in bank portfolio preferences from loans to securities, which could cause banks to look more like mutual funds. If the latter view is true, small firms that rely on banks for credit may be unable to fund new investment. Moreover, monetary policy may be less able to influence total spending in the economy by affecting bank lending.> Keeton seeks to determine how much of the surge in bank security holdings can be explained by temporary factors. He discusses possible explanations for the recent increase in bank security holdings and presents empirical evidence based on the aggregate behavior of bank portfolios over the previous 30 years. He concludes that more than half the increase in security holdings cannot be explained by temporary factors, suggesting that bank portfolio preferences may have permanently changed.