Dollars Everywhere But Not A Dime to Lend
  • The biggest banks in the U.S. are hoarding cash and Treasuries and the highest levels ever
  • American individuals and businesses are struggling to get access to reasonably priced loans

You would think that with interest rates near-zero and bank deposits exploding, banks would be falling over themselves to lend out cash, but you’d be wrong.

Even as the pandemic tightens its grip on the economy, U.S. banks have reduced the portion of their collective balance sheets dedicated to loans to a new low for everyday borrowers.

Total loans at the 25 largest American banks now comprise less than 46% of combined assets, down from 54% this time last year, according to weekly U.S. Federal Reserve data.

And while some of that decrease can be attributed to a rise in deposits, it also provides a fresh reality check for the banking industry which has been quick to trumpet its support for businesses and households amidst the pandemic.

Instead of lending (which is technically what banks are also supposed to do), banks have been expanding their holdings of U.S. Treasuries and government-backed mortgage securities – in other words, they’ve become decidedly more risk-averse.

Even as the yield on junk bonds has dipped below 4%, banks appear less confident on the next phase of economic recovery and seem to be prefiguring a swathe of defaults when government support is eventually withdrawn.

Loans by U.S. banks fell over 1% from last year to US$5.5 trillion, a figure that also includes new loans backed by the U.S. Small Business Administration.

Over that same period, big bank balance sheets expanded by over 17% to US$12 trillion after the Fed flooded the financial system with cash in the hopes that firms would keep credit flowing to the U.S. economy.

Instead, banks have kept large chunks of the Fed injections as cash, and used much of the rest to purchase securities guaranteed by the federal government – at least they’re not using the money to pay out bonuses (they are, but it’s not from this pool).

The big banks are proving yet again that if the Fed expects them to be lending, as they had anticipated they would do in the aftermath of the 2008 financial crisis, they appear to be disinterested in fulfilling those duties.

Despite robust profits at the banks, they continue to retrench staff and make it more difficult for businesses and households to obtain reasonably priced credit.

Whilst large, listed firms have the luxury of heading into the bond markets to raise capital, regular loans at big banks accounted for less than half of their balance sheets and fallen to fresh lows no fewer than 21 times since last May.

It could well be that the business model of banks has changed.

With large, listed companies finding it easier to raise funds in the public bond markets, given the near-zero interest rate environment, banks may be shifting the focus away from lending to hoarding.
And you can take that to the bank with you.

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