Anyone Notice the Change in Venture Capital on Banks’ Balance Sheets?

The venture capital industry is connected with many edges of the global economy. One area that’s experienced a shift in venture capital’s importance is banking.

Question: Would you guess that revenue from venture capital investments is growing or declining in relevance on banks’ balance sheets?  Here’s the look.

Savings Institutions

Savings institutions are entities that simply take deposits, invest the deposited money, and pay interest to depositors. Interestingly (and perhaps a little sad), venture capital investments as a source of non-interest income for savings institutions has virtually evaporated over the past 3 years.

Venture capital income to savings institutions peaked in the fourth quarter of 2008 at about $79 million. Since that 2008 peak, venture capital income collapsed, bottoming at -$27 million in the third quarter of 2009.

Venture capital income experienced a minor resurgence in the subsequent economic recovery, peaking in the fourth quarter of 2010 at about $53 million. Since that 2010 peak, savings institutions have shown virtually no profit from venture capital investments.

Source: FDIC

Commercial Banks

Now, shifting to commercial banks.  Before looking, would you guess a similar trend would emerge for commercial banks?  Or, perhaps commercial banks are  less risk-adverse and such, risk taking might show up as increased income from venture capital investments.

Interestingly, a different picture emerges.

Contrary to savings institutions, income to commercial banks from venture capital investments peaked 3 years earlier in the fourth quarter of 2005 at $729 million (perhaps commercial banks foresaw the housing bubble sooner than the savings institutions).

Revenue from venture capital investments precipitously declined following the housing bubble bursting, bottoming in the fourth quarter of 2009 at a loss of $109 million. Since that bottom, venture capital income to commercial banks has very gingerly regained some ground.

The most recent measure puts the venture capital income to commercial banks at $106 million.  A long way away from the hay-days of 2005.

One clear observation seems reasonable.  There’s a long way to go for commercial banks to make money on venture capital before anyone can mention a venture capital bubble.

Source: FDIC

Conclusion

In the past few years, we’ve seen a shift in the importance of venture capital to banks’ revenue streams.

When looking at commercial banks, venture capital is slowly reviving its importance as a non-interest revenue source.  They are still a long way from the technology bubble of the early years of the century, but moving in that direction.

The picture is quite different for saving institutions.  Venture capital’s importance as a non-interest revenue source has practically disappeared.