The New York Times - "Banks Flooded With Cash":
Bankers have an odd-sounding problem these days: they are awash in cash.
Droves of consumers and businesses unnerved by the lurching markets have been taking their money out of risky investments and socking it away in bank accounts, where it does little to stimulate the economy.
Though financial institutions are not yet turning away customers at the door, they are trying to discourage some depositors from parking that cash with them. With fewer attractive lending and investment options for that money, it is harder for the banks to turn it around for a healthy profit...
Besides paying next to nothing on consumer checking accounts and certificates of deposit, some giants — like JPMorgan Chase, U.S. Bancorp and Wells Fargo — are passing along part of the cost of federal deposit insurance to some of their small-business customers.
Even some community banks, vaunted for their little-guy orientation, no longer seem to mind if you take your money somewhere else.
“We just don’t need it anymore,” said Don Sturm, the owner of American National Bank and Premier Bank, community lenders with 43 branches in Colorado and three other states. “If you had more money than you knew what to do with, would you want more?”...
So far, banks have reported a modest increase in lending this year. Critics, however, fault the industry for being too tight-fisted — no matter how much bankers insist that demand is anemic, especially from the most creditworthy borrowers.
But the banks’ swelling coffers are throwing a wrench in efforts to get the economy back on track.
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...
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 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.”
Before the financial crisis, banks were desperately scrambling for deposits, offering free iPods and interest rates averaging more than 3 percent. New branches sprouted up to gather that cash.
The banks that survived were flooded with cash as depositors flocked to the relative safety of government-insured accounts. The average one-year C.D. rate today is less than 0.4 percent, according to Bankrate.com.
Even as interest rates have fallen, bank deposits have grown at an impressive clip of almost 5 percent a year, according to Trepp, a financial research firm. This summer, as businesses and consumers withdrew their money from stocks, bonds and money market mutual funds because of fears about the debt crisis in Europe and another downturn in the United States, deposits surged to a record level of more than $8.9 trillion.
Brent Brodeski, an investment adviser in Rockford, Ill., said his clients were leaving more money in cash. “They’re only making a quarter percent, but they figure it’s better not to make money than to lose it,” he said.
Rather than fight this, some bankers insist the avalanche of new money will pay off when the economy improves or if it strengthens customer relationships.
“Having a large number of deposits, and being able to grow them, is a great thing to have,” said Timothy J. Sloan, Wells Fargo’s chief financial officer.
Conservative even by banker standards, Mr. Sturm said he had pared his banks’ portfolio of loans by more than two-thirds to some $500 million over the last few years because of concerns that the loans could go bad. He scaled back new mortgages to home buyers in Aspen, Telluride and other luxury Colorado ski resort areas. And he said fewer businesses in Denver and Colorado Springs were seeking financing.
Yet, his banks remain flush with over $1.55 billion of deposits. He would like to make more loans so that he could earn more money, he said, but there are too few of what he calls “quality borrowers,” whose credit record, income and assets suggest they would reliably pay him back...