Banks Pressed to Take Deposits

In return, financial institutions seek relief on FDIC premiums, leverage ratios.

U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.

Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.

Regulators have asked banks to take the deposits anyway, three people said, with one lender accepting $100 billion. The regulators want lenders to take the deposits because it improves the stability of the financial system, according to one of the people, who said U.S. banks are viewed as places of strength.

Some of the largest ones have talked with regulators about softening rules for ratios that measure capital and assets, according to the people, who declined to be identified because talks are private. At least one asked for a waiver on paying higher premiums to the Federal Deposit Insurance Corp., which is less likely to be granted, one of the people said.

“If the helicopter comes raining money on your bank and it’s only temporarily there, it could be excessively costly and disruptive,” said Robert Litan, a vice president of research and policy at the Kansas City, Missouri-based Kauffman Foundation, which promotes entrepreneurial business practices.


Cash Cache
Cash held by domestically chartered U.S. banks, which includes Federal Reserve balances, rose to a record $1.02 trillion earlier this month, up 27 percent from the end of July last year. Deposits held by the 25 largest lenders expanded to $4.69 trillion in the week ended Aug. 10, up 8.5 percent from the end of May. The Fed’s balances advanced to $1.61 trillion as of Aug. 24, from $1.05 trillion a year earlier.

The extra deposits are problematic because they’re subject to withdrawal, so banks have to park the money in low-yielding short-term investments, Litan said. With few other choices available, banks have stashed their excess deposits at the Fed, which means the cash gets counted as assets.

This expands their balance sheets and thus pushes down their leverage ratio, which measures Tier 1 capital divided by adjusted average total assets; the lower the ratio, the weaker the bank, at least in theory. In reality, regulators regard U.S. lenders as relatively strong with sufficient capital cushions, the people said.


Talks With Regulators
Lenders have held discussions with officials at the Fed, FDIC, Office of the Comptroller of the Currency and the Treasury Department, according to four of the people. Spokesmen for the four agencies declined to comment.

Regulators may decide, for example, to ease curbs on deposits swept in from brokerage affiliates as part of any forbearance, said James Chessen, chief economist at the Washington-based American Bankers Association. Under normal circumstances, those deposits could be restricted as part of an enforcement action by regulators, he said.

“You don’t want costly business decisions driven by these temporary flows and regulators are acknowledging that and acknowledging the limited risk,” Chessen said in a phone interview. “Unusual situations naturally call for a discussion on both sides,” he added in an e-mail.

While the Fed has been paying 0.25 percent interest on deposits placed with the central bank, known as interest on excess reserves, since late 2008, it may not be enough to erase the cost to banks of holding the deposits, said Robert Eisenbeis, a former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.


Charging Depositors
At least one firm, Bank of New York Mellon Corp., tried to recoup some of the costs by charging depositors 13 basis points, or 0.13 percent, for holding unusually high balances.

FDIC insurance fees for large banks typically average more than 0.1 percent, three of the people said. In addition, large banks also may apply an internal capital charge of at least 0.1 percent to such reserves, one bank executive estimated.

Lenders likely reached out to regulators “after having watched what Bank of New York did,” Litan said. “I’m sure the banks said there must be another way.”

If the FDIC agreed to forgive some fees, it would have to give up some of the extra premiums that it’s counting upon to rebuild the Deposit Insurance Fund, which covers customers for $250,000 per account in the event of a failure. That makes the agency unlikely to grant a waiver, one of the people said, adding that the existence of the insurance is one of the reasons banks are able to attract the deposits.


Insurance Fund
The FDIC’s fund, which fell into a deficit of almost $21 billion after a wave of bank failures, turned positive during the second quarter for the first time in two years, the agency reported this week. On April 1, the FDIC changed its formula for assessing premiums, increasing the cost for most large banks and adding to their deposit expenses.

That’s adding to the pinch on bank profits as revenue shrinks and yields on assets decline. Net interest margins, the difference between what banks pay to borrow and what they make on loans and securities, declined in the second quarter, “reflecting growth in low-yielding balances at Federal Reserve banks,” the FDIC said Aug. 23 in its quarterly report.


European Crisis
U.S. deposits may surge again if Europe’s sovereign-debt crisis escalates and the region’s lenders face a funding squeeze. Most of JPMorgan Chase & Co.’s almost $53 billion in new deposits in the second quarter were tied to Europe, according to Pri de Silva, a New York-based analyst at CreditSights Inc.

“If you are a bank you don’t want to use excess capital for these hot-money deposits,” de Silva said.

Shares of the 24 U.S. firms in the KBW Bank Index have declined 28 percent this year. The second-worst performer in the index, Charlotte, North Carolina-based Bank of America Corp., lost half its value in 2011 before rebounding this week.

Most lenders already have capital cushions well above the minimum of 5 percent that would trigger an order from regulators for corrective action, according to one of the people.

The Tier 1 leverage ratio for Bank of America, the largest U.S. lender, was 6.86 percent at the end of June, while JPMorgan stood at 7 percent, according to second-quarter regulatory filings. Citigroup Inc.’s leverage ratio was 7.05 percent at the end of June, and San Francisco-based Wells Fargo & Co.’s was 9.43 percent. Citigroup and JPMorgan are based in New York.


Changing Assets
If Citigroup’s average total assets changed by $1 billion, it would alter the leverage ratio by 0.4 basis points, while a $100 million change in Tier 1 capital would affect the leverage ratio by half a basis point, according to the bank’s second- quarter filing.

Shannon Bell, a Citigroup spokeswoman, Howard Opinsky at JPMorgan, Ancel Martinez at Wells Fargo and Bank of America’s Jerry Dubrowski declined to comment.

Relaxing the rules or enforcement could be a slippery slope, said Lou Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based unit of London-based ICAP Plc, the world’s largest inter-dealer broker.

“Asking for a free pass on the leverage ratio for bank deposits by itself isn’t something that regulators would consider,” Crandall said. “The question is whether banks should be able to exclude reserve balances since they are a risk-free asset.”

 

 

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