October 25, 2011
TURNING JAPANESE:In Cautious Times, Banks Flooded With Cash (ERIC DASH and NELSON D. SCHWARTZ, 10/24/11, NY Times)
Ordinarily, in a more robust environment, an influx of deposits would be used to finance new businesses, expansion plans and home purchases. But in today's fragile economy, the bulk of the new money is doing little to spur growth. Of the $41.8 billion of deposits that Wells Fargo collected in the third quarter, for example, only about $8.2 billion was earmarked to finance new loans.
Normally, banks earn healthy profits by taking in deposits and then investing them or lending them out at substantially higher interest rates than what they pay savers. But that traditional banking model has broken down.
Today, banks are paying savers almost nothing for their deposits. As it turns out, the banks are not minting money on those piles of cash. Lending levels have not bounced back from only a few years ago and the loans going out are not keeping pace with the deposits rushing in.
What's more, the profitability of each new loan has shrunk. Because the Federal Reserve effectively sets the floor off which banks price their lending rates, its decision to lower interest rates to near zero means the banks earn less money on the deposits they lend out.
The banks are also earning less on the deposits left over to invest. They typically park that money overnight at the Fed for a pittance, or invest it in ultra-safe securities, like bonds backed by the government. But with interest rates so low, the yields on those investments have been crushed.
In other words, what bankers call the spread is being squeezed -- they are making less money on each dollar they hold. "It's very hard for us to take deposits and make any meaningful spread," said William D. Parent, Hyde Park's chief executive.
In fact, the pressure on spreads poses an even greater threat to the banks' earnings than the new financial regulations. Oliver Wyman, a financial services consulting firm, estimates that the industry's deposit revenue will shrink by more than $55 billion from its precrisis levels, dwarfing the roughly $15 billion in lost fee income from debit card and overdraft restrictions.
In the meantime, retail branch economics are being upended, forcing banks to close branches and lay off thousands of employees. "If you can't put the money to work, what are you going to do with it?" Chris Kotowski, a bank analyst with Oppenheimer, asked. "You're sending monthly statements, you've got people at branches. All that stuff costs money."
The Fed has to <a href="http://www.nytimes.com/2009/04/19/business/economy/19view.html">make the return on cash negative, not just near zero</a>.
Posted by Orrin Judd at October 25, 2011 10:28 PM