Welcome to our fifth issue of Promissory Notes -- our e-newsletter focused on banking and finance insights. We hope you are enjoying our monthly publication.
Banks to Companies: No More Deposits, Please -
"Some banks, awash in deposits, are encouraging corporate clients to spend the cash on their businesses or move it elsewhere."
Why this is important: During the pandemic, near-zero interest rates and loans from the Treasury Department enabled many companies to raise funds at low costs. Corporate clients flooded U.S. banks with deposits, and they continue to do so today. Federal Reserve data indicates that between late March 2021 and late May 2021, bank deposits rose by $411 billion to $17.09 trillion, which is four times the average of the past 20 years. Additionally, corporate clients are taking a conservative approach to their investment strategy, holding on to those deposits and operating with higher cash balances, with no plans to move their cash holdings into other investments and income-generating loans. The companies’ pandemic-driven investment strategy is taking a toll on banks’ profit margins, loan-to-deposit ratios and capital ratios and are messing with banks’ balance sheets. Growing deposits reduce a bank’s ratio of equity capital to assets, making it harder for the bank to comply with minimum capital requirements set by regulators. Regulators suspended some of these requirements during the pandemic, but the suspensions have now ended. Many banks now are looking for ways to generate capital. Bank regulations restrict capital formation for banks, so alternatives to standard stock offerings are limited. The continuing consolidation of banks in the U.S. has created growth opportunity for the surviving community banks and small regional banks. Those are the entities now most threatened by growing deposits and growing loan demand.
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