Bank Deposits Surge $2 Trillion More Than Loans

Slack borrowing demand and tighter lending standards lead to imbalance.

Deposits at U.S. banks exceed loans by an unprecedented $2 trillion as the threat of a slowing economy tempers borrower demand and lenders preserve tightened standards.

Cash deposited at firms from JPMorgan Chase & Co. to Bank of America Corp. expanded 8.7 percent this year to a record $9.17 trillion through Dec. 5, Federal Reserve data show. That outpaced a 3.7 percent gain in loan assets to $7.17 trillion. The gap between what banks take in and lend out has surged since October 2008, the month after Lehman Brothers Holdings Inc. collapsed, when loans exceeded deposits by $205 billion.

U.S. consumers paring debt loads and banks tightening lending practices that fueled the credit bubble in 2007 are limiting the reach of the Fed, which has sought to spur spending by holding its benchmark interest-rate at almost zero for four years. The low rates are limiting investment options, making savers content to hold their cash at lenders, according to Royal Bank of Canada’s Gerard Cassidy.

“Borrowers are still de-leveraging, so the demand is not at the level it would be in this part of the recovery,” Cassidy said in a telephone interview. “That combined with the low-rate environment has led to this unintended consequence.”

The banking industry is lending 78 cents for every $1 it holds in deposits, below the mid-90 percent range cited by Cassidy as “optimal.” Wells Fargo & Co. Chief Executive Officer John Stumpf told Fortune magazine last month that he tries to run the company with $1 of deposits funding $1 of loans. The bank was at about 80 cents for every dollar through September, for a loan shortfall of about $200 billion, Stumpf said.

The tepid growth in bank lending contrasts with the unprecedented pace of borrowing in corporate bonds, where investors are accepting both record-low rates and looser protections to boost returns. Companies with access to capital markets, from medical-device maker Abbott Laboratories to brewer Anheuser-Busch InBev NV, have sold $3.9 trillion of that debt this year, up from $3.29 trillion last year, according to data compiled by Bloomberg.

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. declined for a second day, reaching the lowest level in two months. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 2.3 basis points to a mid-price of 89.6 basis points as of 11 a.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level on an intraday basis since Oct. 18.

Rate Swaps

The measure typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, decreased 0.43 basis point to 12.23 basis points as of 11 a.m. in New York. The gauge narrows when investors favor assets such as company debentures and widens when they seek the perceived safety of government securities.

Bonds of Fairfield, Connecticut-based General Electric Co. are the most actively traded dollar-denominated corporate securities by dealers today, with 49 trades of $1 million or more as of 11:01 a.m. in New York, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.

Deposits have surged 29 percent from $7.1 trillion in September 2008, when Lehman filed for bankruptcy and sparked a seizure in credit markets. Loans have increased by less than 2 percent in the same period, Fed data show.

“Companies are sitting on large stockpiles of cash, and that just gets piled up and sits on bank balance sheets,” Pri de Silva, a bank analyst at New York-based CreditSights Inc., said in a telephone interview. “They’re not investing, so the need for bank loans has come down on the corporate side.”

That’s coincided with tighter lending standards for consumer loans such as mortgages with banks more cautious than before the financial crisis, de Silva said. “Loan growth has been anemic to say the least,” he said.

Less than 10 percent of U.S. banks relaxed underwriting conditions for large, middle-market and small companies during the last three months, according to responses to the Fed’s Senior Officer Loan survey released Oct. 31. In the central bank’s Beige Book business survey, published Nov. 28, homebuilders cited “tight” underwriting as a reason why they and home buyers haven’t been able to take full advantage of low interest rates.

“Small fractions” of U.S. banks reported easing lending rules on business loans and some categories of consumer debt, the Fed said in the loan survey. Underwriting standards for mortgage lending were mostly unchanged, according to the survey.

Household debt dropped to 20 percent of assets as of Sept. 30, down from 21.5 percent last year and a peak of 26 percent in 2008, Deutsche Bank AG analysts led by Matt O’Connor wrote in a Dec. 14 report. That deleveraging should continue through 2013 as the measure moves toward its historical average of 18 percent.

While “a ramp-up of growth” in loans is possible by late 2013, it’s “difficult to have much conviction” in an expansion with the private sector likely continuing to trim debt loads, the analysts wrote. “We don’t expect a meaningful pick up in loan demand” in the near or medium term.

Falling Yields

Borrowing costs have plunged in the four years since the Fed lowered its benchmark lending rate to between zero and 0.25 percent in an effort to prop up economic growth that’s forecast to drop to 2 percent next year, from 2.2 percent in 2012, Bloomberg data show.

Yields on investment-grade bonds reached an unprecedented low of 2.73 percent in November, down from 3.75 percent a year earlier and 9.3 percent in October 2008, according to Bank of America Merrill Lynch index data.

Economic expansion may be imperiled by a combination of spending cuts and tax increases that Fed Chairman Ben S. Bernanke began calling a “fiscal cliff” in February. Obama is considering a possible budget concession on Social Security cost-of-living increases after Boehner dropped his opposition to raising tax rates for some top earners.

Banks may lose some deposits if a program to guarantee non- interest bearing cash comes to an end later this month. The expiration of the Federal Deposit Insurance Corp.’s Transaction Account Guarantee program, introduced following the 2008 credit crisis, may shift $250 billion from bank deposits into money- market funds, Barclays Plc analysts led by Ajay Rajadhyaksha wrote in a Dec. 11 report.

The TAG program guarantees $1.5 trillion in non-interest bearing accounts above the FDIC’s general limit of $250,000. Republicans have labeled the program as a bailout-era program that shouldn’t be extended, and last week the U.S. Senate failed to advance a proposal for an extension.

While the end of the program may lead businesses to shift deposits from smaller banks into larger lenders, it isn’t likely to drive out deposits from the banking system, Cassidy said.

That may prompt banks to hold more Treasuries and government-backed mortgage securities as they deploy excess deposits. Lenders held $1.87 trillion of U.S. government debt and so-called agency securities as of Dec. 5, a 9.7 percent increase from last year.

“It’s not how you want to make your money if you’re a bank,” Noel Hebert, who oversees about $250 million as chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, said in a telephone interview. “The income stream you’re trying to displace was much more profitable.”


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