An Abundance of Riches: Do Increasing Deposits Mean Less for Borrowers?

By Rebecca H. Laird

Attracting deposits for banks isn’t always an easy thing, witness the use of brokered deposits. But these days, since the beginning of the pandemic, deposits in banks have jumped to over $15.8 trillion in the first quarter, or over 13% increase from the prior year, and were up again for most of the second quarter.[1] Both businesses and individuals seem to be awash in liquidity. Individuals are selling stocks and holding cash, companies are holding on to their cash and not investing in capital or other expenditures. Many small businesses that received PPP or similar COVID-related loans are holding the proceeds and assessing which expenses they can be allocated against.

For banks, ordinarily all this cash would be a good thing. They bring money in at very low interest rates and lend it out at higher rates in the form of loans.   But in fact the ratio of loans to deposits is going down from 71.9% to 68%. The reasons for this may be varied. It may be that demand for loans is not high because small businesses have access to the PPP or other low cost loan programs. Or, it may be that larger businesses are not borrowing due to the uncertainty in the marketplace.

On the other hand, it may be that it is not a demand issue: it could be a supply issue. Lenders are worried about the borrowers’ credit worthiness given the uncertainty in the marketplace and the number of bankruptcies filed, even by established companies, and therefore perhaps they are not making credit available.

Another factor that may be having an effect is where the deposits are distributed. It is a fact that large amounts of cash reside in the large money center banks. Some of these funds are deposited by brokers who have cash resulting from their customers’ sales of stock. Since customers want their deposits to be FDIC-insured, the large banks distribute the funds to other large banks in a “daisy chain” to place them in FDIC-insured deposits. But the number of these banks is limited to usually not more than 25 to 100 banks because of requirements imposed by the SEC. As a practical matter, this means that a large amount of cash is thinly spread among only the largest banks. These banks in turn do not have the relationships with small and medium sized business throughout the country to extend credit widely.  

Looking down the road, if banks cannot profitably put their money out in loans, borrowers may be forced to look to non-bank lenders for funds. And if banks aren’t making loans, banks may also be pressured to limit the amount of deposits they can accept. On the asset side, it could be that the loans that they have made will not be repaid, which would further put pressure on bank balance sheets and reduce their ability to make more loans. All of this indicates a concern that the delicate balancing mechanisms that have kept our economy running for decades may be in for some serious stress in the coming months.

[1]  See FDIC Quarterly Data report at

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