Banks across the nation managed to slightly increase their holdings of municipal debt in 2008 and reach their highest level of ownership since 1991, despite the turmoil that transformed the securities and banking industries last year, according to annual information compiled by Highline Data LLC.

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The Cambridge, Mass., financial and market data provider reported that bank ownership of municipal debt grew by 7.2% on a cost basis to $154.5 billion, and 1.7% on a fair-value basis to $147.4 billion in 2008. That compares to growth of 5.3% on a cost basis to $144.1 billion and 4.4% on a fair-value basis to $145.0 billion in 2007.

It marked the 13th consecutive year that banks increased their municipal portfolios, according to Highline.

Some of the growth was driven by banks' simultaneous decrease in equity asset allocation at a time when Wall Street was jolted by severe turmoil, said Matt Fabian, a senior municipal analyst at Municipal Market Advisors.

"Because of their tax treatment, municipals help banks pay a larger fee to their depositors and with banks struggling to compete with each other, that [strategy] was valuable," he said.

Significant growth in municipal assets by three of the country's largest institutions - Citibank NA, Bank of America, and Wachovia Bank - helped boost the industry's totals.

Those three banks ranked first, second, and third, respectively, for having the largest increases in municipal debt in 2008. Calls to the banks seeking comment were not returned by press time.

Las Vegas-based Citibank, which also ranked first among the nation's 500 banks with the largest municipal portfolios, increased its tax-exempt holdings by 36.4% - or $4.22 billion - to $15.87 billion, its highest level in the past four years. It held $11.63 billion in 2007, $14.99 billion in 2006, and $12.88 billion in 2005.

Charlotte-based Bank of America, which ranked second among banks with the largest municipal portfolios, boosted its portfolio by 51.1% - or $3.55 billion - to reach $10.51 billion, its third straight year of growth in municipals, versus $6.95 billion in 2007, $6.32 billion in 2006, and $4.68 billion in 2005.

Although Charlotte-based Wachovia had the fifth-largest municipal portfolio, it had the third-highest increase in muni holdings - 44.3% - and added $1.55 billion to its portfolio, ending 2008 with $5.04 billion, up from $3.49 billion in 2007. The noticeable increase comes on the heels of minimal growth in the previous two years of 5% in 2007, and just 2% in 2006.

Howard Mackey, president of the broker-dealer unit of Rice Financial Products in New York City, said growth among large banks is typically facilitated by their sheer size, but in some cases is due to mergers and acquisitions.

"When you get into the regional and country banks, their capacity decreases substantially," he said. In the case of a merger, the smaller bank's portfolio would likely disappear after being consolidated into the larger bank's assets, he said.

Other factors that contributed to growth in banks' tax-exempt holdings was the availability of solid bank-qualified municipal bond issues last year at a time of unprecedented muni-to-Treasury spreads that exceeded 150%, making municipals a lucrative opportunity for institutions, like banks, Mackey said.

Meanwhile, other banks that boosted their municipal assets included Cincinnati-based US Bank, which had the third-largest portfolio of municipal debt, even though its holdings declined slightly by 0.9% to $7.12 billion at the end of 2008, down from $7.18 billion at the end of 2007.

JPMorgan Chase also showed a noticeable increase in holdings, adding $879 million to bring its portfolio to $931 million - maintaining the 14th-largest bank portfolio - up from just $52 million at the end of 2007.

Bank of New York Mellon added $837 million to increase its portfolio to $894 million - ranking 17th - up from $57 million at the end of 2007. The growth was a significant improvement from the previous two years when the bank saw declines in its municipal holdings of 29.6% in 2007 and 63.2% in 2006. However, the bank declined to comment on its recent growth, according to a spokesperson.

"I think that the large banks, in support of their commitments to provide liquidity to many floating-rate issuers, were forced to become larger holders at year-end because the money funds were rejecting so many securities," Fabian said.

Elsewhere, some banks experienced a noticeable decrease in municipal ownership, which may have been the result of banks' increased demand for ultra-liquid assets, such as Treasuries and government agency paper, during last year's financial and credit turmoil, Mackey said.

"Liquidity became a real issue last year, and even though credit quality did not decline in certain sectors as much as one might expect given the crisis, liquidity dried up rather substantially," he said.

Fifth Third Bank of Grand Rapids, Mich., Marshall & Ilsley Bank of Milwaukee, and Independent Bank in Ionia, Mich., were the three institutions with the largest declines in muni assets last year.

Calls seeking comment from the banks were not returned by press time.

Fifth Third cut $157.1 million from its municipal holdings in its third consecutive year of declines and ranked 48th among banks with the largest muni portfolios, ending 2008 with $305.8 million, down 33.9% from $462.9 million at the end of 2007.

Marshall & Ilsley Bank's holdings declined by $146.1 million and ranked it 10th among the largest portfolios, declining by 12.6% to end 2008 with $1.01 billion. The activity marked its third year of consecutive declines in municipal assets, compared with $1.163 billion at the end of 2007.

Municipal holdings at Independent Bank, on the other hand, dropped by 48.3% - or $98.6 million - to $105.66 million from the $204.33 million that the bank held at the end of 2007. The decline earned the bank 145th place among the 500 banks' largest muni portfolios.

Looking back, the percentage of municipal ownership by banks hit double digits in 2006 when holdings rose 10.2% on a cost basis to $136.9 billion and 10.1% on a fair value basis to $138.8 billion, according to Highline.

Prior to that, growth peaked in 1998 by as much as 13.1% on a cost basis to $86.59 billion and 13.3% on a fair value basis to $89.46 billion.

Comparatively, banks held the least amount of municipal debt back in 1992 when they declined 2.5% to $72.4 billion on a cost basis and decreased 2.2% to $76.1 billion on a fair-value basis from the previous year.

Going forward, the American Recovery and Reinvestment Act increased the benefits accruing to banks acquiring and holding municipal debt in 2009 and 2010.

The stimulus modified the 2% de minimis rule for financial institutions to include banks so they are able to deduct 80% of the cost of buying and carrying tax-exempt bonds, to the extent that their holdings don't exceed 2% of assets. The act also expanded to $30 million from $10 million the small-issuer exception for bank-deductible bonds. Banks can now deduct 80% of the cost of buying and carrying the tax-exempt bonds sold by issuers whose annual bond issuance is less than $30 million.

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