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Banks Don’t Want Any More Deposits

by Peter Renton on October 26, 2011

I noticed this article in the New York Times yesterday. The gist of it was that banks literally have too much money and they do not know what to do with it.

Traditionally banks have made money by taking in deposits and lending out those deposits at slightly higher rates. Wells Fargo took in $41.8 billion in cash in the third quarter but of that money just $8.2 billion (less than 20%) was earmarked for new loans. Looks like the traditional banking model is breaking down.

And it is not just the big banks that we are talking about – many of the small regional banks are also swimming in cash. Here is a quote from the owner of a regional bank in Colorado:

“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?”

Sturm went on to say that his bank has reduced their savings account rates below 0.15% and dropped their C.D. rates as well.

No wonder Lending Club and Prosper keep growing so fast. Banks still aren’t lending and they are offering less and less to their depositors. Looks like the perfect storm for p2p lending will continue.

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{ 26 comments… read them below or add one }

Charlie H October 26, 2011 at 1:05 pm

“Traditionally banks have made money by taking in deposits and lending out those deposits at slightly higher rates. Wells Fargo took in $41.8 billion in cash in the third quarter but of that money just $8.2 billion (less than 20%) was earmarked for new loans. Looks like the traditional banking model is breaking down.”

Part of this is operation twist by the fed. 10 year yields are ~2% and 30 year yields are ~3.25%
Historic run rate for inflation is 3.1-3.5%
Thats called negative real yield…..

Bilgefisher October 26, 2011 at 2:16 pm

@Charlie. Ive always wondered about the economics of that. It would be interesting to get a breakdown of the behind the scenes business of banks and how federal regulations/interventions have played into to their recent operations. Its such a heated topic that its hard to get non-opinion based facts on the subject.

Peter Renton October 26, 2011 at 2:34 pm

@Charlie, So I get why banks wouldn’t want to invest in these 10-year or 30-year bonds, but wouldn’t that give them even more incentive to lend their money out to businesses or individuals at rates well above inflation? Are there really so few creditworthy borrowers out there?

@Bilgefisher, I don’t get into economics very much on the blog because of that very point. It really is difficult to get non-opinion based facts.

Dan B October 26, 2011 at 3:17 pm

New York Times or not, I’d bet that bank owner was misquoted. It’d be no big shock as it’s happened to me twice.

Peter Renton October 26, 2011 at 4:18 pm

@Dan, It is certainly possible but I think the principal holds true – banks are awash in cash (as are most large corporations).

Dan B October 26, 2011 at 9:51 pm

Banks may very well be awash in cash & yes I do realize that banks pay fees like FDIC insurance, among others, based on every dollar they take in deposits………………But honestly if you’re paying your depositors only 0.15% & you’re having trouble finding ways of turning a profit with that deposited money then I’d say that you have a really serious lack of imagination.

Shawn October 26, 2011 at 11:10 pm

I don’t doubt, either, that they have plenty of cash on hand and are simply refusing to loan it. Fear does crazy things to people, especially in a bureaucratic like organization like banks that have been beaten down. As we’ve seen, diversified over a wide enough portfolio (addressing consumer loans only, not mortgages, etc), it’s hard to lose money with even only fairly reasonable risk standards. In other words, it doesn’t make sense for them to not be loaning money back out right now.. they’re not acting ‘rationally’ in the traditional economic sense (though, even with an economics degree, I disagree with how the term ‘rational’ is used commonly and don’t think it encompasses enough… everyone acts rationally just not in money terms). For example, and I was going to post this in the other thread… when I was looking for a loan to invest in Prosper, I was denied by USAA… this is normally a company that works with service members but here I am with several years in the service (all of which as a customer of USAA), I use several of their products, have direct deposit with them, and a guaranteed job… and I had just paid off a month or two before a 5 year loan with them. Yet, I was able to get the loan through Prosper. In money terms, what banks are doing does not make sense and so I don’t doubt they have mounds of cash and they only reasonable explanation is fear.

Prosper lender “shawnw2″

Dan B October 27, 2011 at 3:24 am

That’s so true. 9 months or so ago I walked into Chase to inquire about a “stock secured” loan. To those unfamiliar with this it’s simply where you take out a low interest (2.5-4%) loan for up to 60-70% of the value of the stocks that you turn over to the bank as collateral. If you default on the loan, the bank takes your stock. Normally you can only do this with NYSE stocks or very large cap NASDAQ. In other words, stocks with reasonably low volatility. Without getting into the advantages/disadvantages of stock secured loans, the one thing everyone can usually agree on is that stock secured loans are very very low risk loans mainly because of the fact that the bank gets to set the % of the stock’s value that they will loan up to.

Anyways………..I’ve done this loan before (about 10 yrs ago) with some BRK-B that I’ve had long term & didn’t want to sell. Super quick & easy loan to get. I don’t think they even did a credit check back then. So getting back to 9 months ago, I figured this would be easy as well. Guess again, as I didn’t even get to fill out an application this time. I was told all the way up the chain of command that Chase no longer offered “stock secured” loans because they were considered to be “high risk” products. How is this “high risk” when the bank holds my stock as collateral & they start out with a 30-40% cushion on the downside?? But they had nothing else to say to me, just “high risk”.

Like Shawn said, it’s the “fear” thing.

Peter Renton October 27, 2011 at 6:34 am

@Dan, I think this is what happens in large organizations where everyone is scared of losing their jobs. No one got fired (although maybe they should) for not approving a loan. So even though Berkshire Hathaway is a safe investment (particularly with a 30-40% downside cushion) after 2008-09 no doubt someone high up in the bank said we shouldn’t allow these kinds of loans anymore.

@Shawn, I would have thought an organization like USAA would still be lending to active service members. I think banks are going to look back at this time period and think they were complete idiots for not lending more.

I took out a home loan in March 2009. It was a standard loan for $417,000 which was just 45% of the assessed value of the home we were purchasing. At the time I had recently sold my business to a large public company and had a six figure income (working for the new owners) and could have easily paid for the home in cash.

My mortgage broker had a hell of a time finding a bank to make the loan. After going back and forth with one bank for weeks I told them I refuse to send in any more paperwork (they had four years of tax returns and statements from every investment I owned) and if they don’t accept my documentation that I would just pay for the house in cash. Just as I was about to cancel the loan they finally accepted me. So back then even if you didn’t need the money they still didn’t want to lend to you.

Charlie H October 27, 2011 at 10:59 am

You would think that the bank would jump at the chance to own BRK-B
at 40% bellow par. Best case is that they make an easy 5% of interest on you. Worse case they own Berkshire Hathaway for 40% bellow Parr. That one heck of a “problem” to have.

While that would not be a high risk loan because it collatoralized, I would bet you that the banks regulator does classify those types of loans as being “risky” and hense requiring a higher amount of Tier-1 equity and loan loss reserves to be set if they make those types of loans.

Charlie H October 27, 2011 at 11:04 am

@ Peter Renton
Most financial instruments are either dirrectly or indirrectly tied to the 30 year or 10 year T-Bond.

When doing a Risk adjusted return on capital analysis typically the 10 or 30 year yields are the benchmark used to compare the potential investment.

As yields rise and fall, certain investments make more or less sense from a risk basis.

Granted this assumed a near zero default risk on 30/10 year T-bonds….

Dan B October 27, 2011 at 12:00 pm

Peter…………Hold on, you were going to pay cash for a $900k house? You’re part of that vile 1% aren’t you? :)

Kyle October 27, 2011 at 1:07 pm

@Dan I would think that one of the problems you ran into with the stock secured loan even for BRK-B is not that they worry about that stock, but a policy change encompassing all stock secured loans. One policy covering every situation, despite this being a unique circumstance, and are just staying consistent in their decision making.

Dan B October 27, 2011 at 1:51 pm

Absolutely, I realized that it had nothing to do with the stock. The bank wasn’t doing any stock secured loans…………which is still really stupid.

Charlie H October 27, 2011 at 1:58 pm

Occupy Social Lending!
Wait wrong website…..

Peter Renton October 27, 2011 at 3:26 pm

@Charlie, How does one occupy a website? I think my server is in Houston somewhere….although it might be Richmond, Virginia.

@Dan, I am still not sure what qualifies someone to be in this vile 1%. I have never worked for a bank or received any bonuses – ever.

@Kyle, I think people saw what happened in the stock market in 2008-09 and decided to make a blanket policy about it. In 2009 that probably seemed like an ok decision. But with all the cash they have these kinds of secured loans would be relatively safe way to loan money. Probably safer than Vegas real estate….

Dan B October 27, 2011 at 3:35 pm

Peter……..It has little to do with banks. I’m not sure what the exact qualifications for the 1% club are either. But I am absolutely sure that with one arm tied behind my back I could effortlessly persuade any 99% gathering that anyone who pays $900k cash for anything is definitely part of the vile 1%. :)

Peter Renton October 27, 2011 at 3:44 pm

@Dan, So if see you on TV with a sign saying “Occupy /” I will not be a happy camper…..On second thoughts it might be some good publicity for me… go ahead.

Roy S October 27, 2011 at 6:42 pm

@Shawn, I read an article a few years back where the conclusion was that people are irrationally rational, meaning they act irrationally in a rational way. It was interesting, and i should probably go back and re-read it.

I think the real issue is that the entire economy is paralyzed out of fear of government regulation. I’ve heard that the government is prosecuting banks for predatory lending at the same time they are prosecuting them for selling bad loans to Fannie Mae and Freddie Mac–talk about irrational! It’s a catch-22. You don’t make bad loans, you’re a predatory lender. You do make bad loans and then sell them to the government because you don’t want them on your books you’re committing fraud. This is what our government has become over many, many decades, but it’s really become bad lately. I don’t blame the banks for not wanting the cash and not wanting to lend.

@Dan, It has nothing to do with banks. In my opinion, Occupy Wall Street is based purely on greed and jealousy. And with that said, I think we need an Occupy /!

Dan B October 27, 2011 at 8:41 pm

Roy S……………I don’t know Roy, I think you’re on your own on that one. My online agitation to the contrary non-withstanding, I’m much more of a back channels & back room deals type of guy. Standing out in the cold & urinating in alleys just to make a point isn’t my idea of fun. :)

Simon Dixon November 1, 2011 at 5:02 am

Its funny, but most people think that banks need deposits to lend. The reality is quite different however.

When you borrow money from a bank they actually create brand new digital money by adding the amount on their balance sheet as both an asset and a liability. Deposits are actually liabilities to banks as it is money they owe you and loans are both liabilities and assets as they have a claim on your money and they simultaneously owe you your deposit.

The only reasons banks want deposits si to balance additional loans.

It is a common misunderstanding about baking.

They do not need your money as they have a licence to create money called a banking licence.

Hope this opens new interest in studying the baking ponzi scheme.

Simon Dixon

Peter Renton November 1, 2011 at 9:16 am

@Simon, But banks can’t just create money out of thin air. They need some source for this capital even though it is just digital money. With today’s super low interest rates maybe that is not a problem because they can just get the capital they need from the Federal Reserve.

Simon Dixon November 2, 2011 at 11:14 am

I used to think that until I spent several years really studying the flow of money. The capital requirement is completely loopholed and they can create money out of thin air. The biggest barrier is the willingness to lend to credit worthy borrowers.

In the UK we have no reserve requirement, in US you do, but banks don’t play by the rules and this can be loopholed by using securities like bonds as capital which was all created as debt in the first place. The real constraint is making sure they have enough cash for those who demand cash, but that is normally solved through the money markets.

When you completely trace the flows you realise what a ponzi scheme banking is.

Simon Dixon

Ben April 7, 2012 at 3:44 pm

Peter, I enjoyed this post and reading others’ comments about it. I work at an F.I. where I am in a position where I am somewhat privy to some of the points that were brought up in your post and in the comments. Just based on the experience of the F.I. that I work at, here are my comments.

The situation isn’t necessarily that banks have tightened up on lending across the board (although for many banks that is the case too). We too have seen excessive deposit growth while our loan portfolio has remained steady. Here is why the F.I. that I work at has excess deposits:

1. During this time of low rates and where a lot of investors still view the stock market as volatile, savers/investors are still placing more of their extra cash at a bank instead of investing it in stocks or bonds. Also, while consumer confidence and spending has “improved”, there is still a lot of people who are being conservative with their money.

2. While this definitely isn’t the situation for all financial institutions, we actually haven’t tightened our lending policy one bit over the last 5+ years. We have money that we want and are willing to lend and we are willing to lend it to the exact same people that we were 5 or 6 years ago. The problem is that 1. loan demand is down for us (as people are still being more conservative about buying) and 2. More people have taken a financial beating over the last 5 years which disqualify them from receiving a loan (unemployment, lower credit scores, etc.)

Of course, the bottom line is that it is hurting our net interest margin, as we and other F.I.’s are having to invest that excess cash into bonds and CDs at much lower yields then we would get for loans.

Roy S, you are right, banks and businesses in general are very hesitant right now because of all of the uncertainty with the growth of regulations and the healthcare law. Regulations are costly for businesses and usually in the end it ends up hurting the consumers (the very people it is meant to help) more than helping them. Any cost that government causes a business is in some form going to be passed on to the consumer.

Peter, I agree, the current situation does allow P2P to fill in the gap. Many other financial institutions have had to tighten their lending policy. In addition, deposit rates are next to nothing and they will remain that way for at least several more years. Even once market rates do start to increase again, there will be a huge lag in the increase of deposit rates compared to the increase in loan rates.

Although, p2p lending is considerably more risky than a bank deposit, the potential return is very attractive and the monetary barrier to get started is low. I think as rates stay low, more savers/investors will become aware of p2p lending and will be willing to take on the risk of p2p lending.

Peter Renton April 8, 2012 at 7:47 pm

@Ben, Thanks for the insights. It is always good to hear from someone inside the financial industry. I have heard many times that banks want to lend and I always thought, “then why the hell don’t they?”. But your argument makes sense. Fewer qualified borrowers are available today than 4 or 5 years ago. P2P lending can take up some of that slack because their lending standards are somewhat lower than many banks.

Keep up the good work on your blog, too. I have added it my list of finance blogs in Google Reader.

Ben April 11, 2012 at 4:44 pm

@Peter Renton, Thank you for your support!!!

One other thing to keep in mind as far as P2P lending vs. the banking system… At least as of right now, they are two completely different animals. P2p Lending offers the benefit of a higher return, but it is also an “investment” for those funding the loans. The very nature of investing is that there some risk (hence the higher return). While p2p lending has become regulated under the SEC, banks are heavily regulated by both government regulators as well as their deposit insurance provider (FDIC for banks and NCUA for credit unions.) Bank regulators expect banks to make decisions that keep depositors money safe. As such, the regulators (especially over the last several years) scrutinize banks lending policies to make sure that depositors’ money is safe.

So there is (and should be) a big difference between the policies of a lender who’s loans are financed though “investors” and a lender who’s loans are financed through savers. A saver, 100% expects that there money is safe and will be returned to them when they need it. Whereas an investor, although they hope and may even expect that their principal will be returned to them, it is still an “investment” and there is a risk that they will lose some money.

I think there is a need for both formats. It is necessary to keep some money safe in a bank; however, I also love how p2p lending empowers both savers and borrowers by taking some of the middle man out.

I’ve been enjoying reading your blog. It is the most comprehensive resource that I have found on p2p lending. Nice job!

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