New figures released this week show how Bermuda banks have exercised a strategic shift on the asset side of their balance sheets, making a decisive change in cash or investment management.

Second quarter Bermuda Quarterly Bulletin of Statistics released this week have revealed how billions of dollars have been shifted in recent years to investments, and away from reliance on more traditional inter-bank deposits.

Banks have traditionally put out short term money into the inter-bank market, where other banks essentially pay minimal returns. The strategy was designed to stay liquid, having access to the money at a moment's notice.

But universally, banks began in this decade to use vehicles such as US Treasury instruments as an equally liquid, but more rewarding short term investment.

President of the Bank of Bermuda, Charles Vaughan-Johnson, said, "It's become increasingly difficult for banks to make money out of simply placing deposits with other banks.

"And various events have made banks a bit more cautious about counter-party risks of simply placing money on deposit with other banks. There could be concerns about the stability of various banking facilities around the world in some parts of the world.

"This doesn't really apply to us, because we are all in US dollars effectively. But there can be concern about the real stability of the banking system in some places, especially some of the Asian countries. And then, again, there is the minuscule return.

"It's like depositing money in a Japanese bank and then paying them for the privilege.'' The move by the Bermuda banks came with the full understanding of the Bermuda Monetary Authority (BMA).

BMA general manager, Malcolm Williams, noted: "Our awareness of their strategy is part of our ongoing liaison with them. Major decisions of that nature we would be involved.'' Much like their overseas counterparts, local banks have changed the process of treasury management, the process of managing the liquidity or asset side of the balance sheet. The new philosophy was evident in official figures released this week.

The Bulletin showed on the assets side of the combined balance sheets of Bermuda banks that money allocated for investment rose to a high of near $954 million in 1993. In 1994, the figure dropped to somewhere near half a billion dollars, but in 1995 climbed as high as more than $3.3 billion in the fourth quarter. In the first quarter of this year, investment money was tagged at in excess of $4 billion.

Concurrently, time deposits dropped from a high of $5.2 billion in 1993 to $2.3 billion in 1996.

The Bank of Butterfield executive vice president, treasury and capital markets, Malcolm Brown, points out, too, that the banks deposit/liabilities are growing year over year. But he sees better management of the assets as a key issue.

Bermuda's very liquid and conservative banking institutions, especially the Bank of Bermuda, gravitated to substantial investment in money market instruments like US treasury bills.

There is a liquidity issue too, because banks can't afford to have all their money tied up in long term investments.

Mr. Brown said, "There has been a gradual trend more toward high investment grade instruments as alternatives to the inter-bank markets, that historically Bermuda banks have been very substantial participants in.

"There is a larger proportion of investments on our balance sheet than in previous years. Banks would have their trading portfolio assets, which are held for a short period of time. There is also the investment account assets which are held for a longer period of time, generally through to the maturity of the asset itself.

"Most banks will have a broadly diversified portfolio of assets that are being used to match against their deposit liabilities.

"Increasingly, as banks become more sophisticated in their investment management activities, they will have a combination of assets in both the inter-bank market and in the short, medium or even longer term capital markets.

"It's just a matter of managing the balance sheets of banks more effectively than has been done in the past.'' He also speculated that Bermuda banks would have a larger proportion of assets than most banks in these markets, because of the relatively low percentage of loans on their balance sheets.

"It's become increasingly difficult for banks to make money out of simply placing deposits with other banks.'' -- Charles Vaughan-Johnson (above)