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Hedley LaMarr
25th October 11, 05:17 AM
http://www.nytimes.com/2011/10/25/business/banks-flooded-with-cash-they-cant-profitably-use.html
(http://www.nytimes.com/2011/10/25/business/banks-flooded-with-cash-they-cant-profitably-use.html)

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.
In August, Bank of New York Mellon warned that it would impose a 0.13 percentage point fee on the deposits of certain clients who were moving huge piles of cash in and out of their accounts.
Others are finding more subtle ways to stem the flow. 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?”
Like Mr. Sturm’s banks, Hyde Park Savings Bank, a community lender in the Boston suburbs, lowered its C.D. rates this spring to encourage less-profitable customers to move on. As a result, Hyde Park shed about 1,000 of its 35,000 C.D. holders, preferring customers who also had a checking or savings account.
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.
Normally, banks earn healthy profits by taking in deposits and then investing them or lending them out at substantially higher interest rates than what they pay savers. But that traditional banking model has broken down.
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 other words, what bankers call the spread is being squeezed — they are making less money on each dollar they hold. “It’s very hard for us to take deposits and make any meaningful spread,” said William D. Parent, Hyde Park’s chief executive.
In fact, the pressure on spreads poses an even greater threat to the banks’ earnings than the new financial regulations (http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/financial_regulatory_reform/index.html?inline=nyt-classifier). Oliver Wyman, a financial services consulting firm, estimates that the industry’s deposit revenue will shrink by more than $55 billion from its precrisis levels, dwarfing the roughly $15 billion in lost fee income from debit card and overdraft restrictions.
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 (http://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 (http://topics.nytimes.com/your-money/investments/mutual-funds-and-etfs/index.html?inline=nyt-classifier) because of fears about the debt crisis in Europe (http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt_crisis/index.html?inline=nyt-classifier) 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.
His next option is to invest those deposits in low-risk securities, like mortgage bonds backed by Fannie Mae and Freddie Mac, which in recent years paid as much as 3.75 percent. Today, they are paying, on average, less than 1.15 percent. Deposits parked at the Fed fetch a mere quarter of a percentage point. Federal deposit insurance premiums and other account maintenance costs cut deeply into his returns.
As a result, Mr. Sturm is keeping savings rates below 0.15 percent and setting C.D. rates below those of nearby competitors. “I don’t want to take deposits in and lose money,” he said.

I have spent 10 minutes trying to figure out what to write about this, but I've got nothing. I honestly do not understand this. At all. Is there anyone with a logical explanation for why banks have too much money?

Cullion
25th October 11, 05:48 AM
Yes. They've been given trillions by quantitative easing and bailouts from public funds, and they don't want to lend it into a shakey economy full of assets that are still overpriced. So they're going to wait until things are priced at a level likely to be profitable. Just like the rest of you should be.

Where their own profits are concerned, their senior managements believe almost 100% in the Austrian theory of the business cycle and most other observations of that school. It's only when they're pleading for the power to print money or loot public funds that they don't.

Hedley LaMarr
25th October 11, 06:38 AM
Yes. They've been given trillions by quantitative easing and bailouts from public funds, and they don't want to lend it into a shakey economy full of assets that are still overpriced. So they're going to wait until things are priced at a level likely to be profitable. Just like the rest of you should be.

Where their own profits are concerned, their senior managements believe almost 100% in the Austrian theory of the business cycle and most other observations of that school. It's only when they're pleading for the power to print money or loot public funds that they don't.
I've been up for about 36 hours now, let me see if I understand this:

The banks needed, for whatever reason, a bailout, where they were given untold amounts of money that the American people cannot get an accurate estimate for, under the presumption they would start lending it. Instead, they stockpiled it. Now that people are actually saving money, the banks are running in to the problem of having too much money to pay dividends on through their revenue so the banks are now charging people with large sums of money to keep their large sums of money in their bank.

Cullion
25th October 11, 06:55 AM
Yes. Furthermore, they're waiting for enough enough of you to go broke to be worth investing in again. Using money you were forced to give them, either directly out of public funds, or by the devaluation of the pitiful little amounts you peasants are allowed to stuff under your mattresses in the hope of retirement.

I think people thought I was trolling when I pointed out that 'giving the banks money so they have some to lend back to you at interest doesn't make any sense' back in 2008.

Ajamil
25th October 11, 08:37 AM
I stopping giving money to banks about a year and a half ago. One of my smarter moments. My credit union has a better online service anyway.

Spade: The Real Snake
25th October 11, 04:31 PM
Latest pull will be this:

http://latimesblogs.latimes.com/money_co/2011/10/home-mortgage-refinancing-overhaul.html

Ajamil
25th October 11, 08:33 PM
easing rules and reducing fees to allow potentially many more homeowners to take advantage of historically low mortgage rates.
Isn't this cited as a cause​ of the housing market downfall?

Spade: The Real Snake
25th October 11, 10:31 PM
Ideally it is supposed to encourage banks to refi the underwater mortgages by easing up on the 125% rule




Sent by telekinesis via Cerebro

Arhetton
26th October 11, 02:43 AM
This is just banking 101, not confusing at all.

From the banks point of view, personal finance is the other way around. The loans they lend out are income generating assets, and the deposits people put in the bank are expensive liabilities that they have to pay. They have to lend out alot more than the original deposit to make money off the interest and also have cash on hand for withdrawals the depositors might make. The best example of this is how credit and debit cards are named (from the perspective of the bank, not the consumer). I mean your credit card is actually your debt card, and your debit card is actually your credit card!

There's a saying that in a recession "cash is king".

Basically because its liquid and transferable. So lots of individuals and companies would be converting their other assets (shares, real estate, investments etc) to cash because of uncertainty.

The banks could just keep lowering the rate of return on cash and introduce more fees until people move their cash back into other asset classes. It sounded like they are doing exactly just that and this article is a non existent 1st world problem.

What the banks need to do to make a profit is lend out at a higher rate (eg 8%) to borrowers than what they pay to depositors (eg 5%). As long as they do that they can keep making a profit (8% - 5% = 3% profit - you can think of this as the spread). It might be hard to find as many people willing to take out loans in a tough economy, so they are forced to lower both the cost of taking out a loan with interest, and also the return on investment for depositors (so in this situation, maybe they have to reduce lending to 4% and deposits to 2%. The bank gets squeezed when they have to reduce their spread, say from 3% to 2%). When the bank gets squeezed it does one of three things - (1) increases the borrowing rate (they can't do this because they are having trouble finding borrowers) (2) decreases the cash return on deposits (the article said they were doing this) (3) introduce or increase account fees (and they are also doing this).

This is very, very typical bank behaviour. As soon as their profit (spread) is threatened, they tweak things to make sure they are still going to make their profit targets.

Modern banks have all sorts of insane ways of calculating the different products and amounts people have borrowed (high interest credit cards, variable rate home loans etc) versus amounts people have deposited (transaction savings accounts, term deposits etc) and how to calculate the spread. They also know exactly how much revenue they make from things like account fees and credit card fees etc.

What this article tells me though, is that most people are betting that the economy is going to go through another rough patch.

There is one other situation when rates of return drop to 0% or even negative, and thats deflation. I don't think that will happen in the USA though. I would expect inflation.

Hedley LaMarr
26th October 11, 03:01 AM
Thanks for the post, Arhetton. If you got time, I've got a few questions.

If this is a sign that banks are hard up for borrowers, would now be an opportune time for someone with good credit to get a business loan?

What asset classes are profitable during a recession?

Arhetton
26th October 11, 03:09 AM
In general, yes it should be easier to get a loan. The banks might also have new lending criteria post gfc madness (ie. do not lend to broke bums). So it might not be walking on cloud nine but yes it should be easier.

Banks do not like small business though. Simply for the reason many small businesses fail in their first few years of operation. You might find in a recession that the banks tighten lending to small business (or cancel overdraft facilities etc).

This sucks because small business could really power a recovery.

Generally in a recession some assets are undervalued as the market panics or revalues things lower than their true value, or you might be able (if you are cashed up) to buy a solid business that is struggling with its cash flow. The idea though is that you are expecting the assets you buy to re-value upwards when the recession ends.

At the moment, US property looks amazing. I live in Sydney and we have one of the highest costs of living in the world. I could buy two apartments on the east side in New York for the price of one house in the 'white collar' areas of Sydney. Having said that, the US economy (and the US dollar) still looks risky as.

Or you could just try to get some cheap shares but it all involves risk.

Thats why everyone is keeping their assets as cash - no one is certain of whats going to happen!

Cullion
26th October 11, 05:20 AM
Applying pressure on banks to get them to lend to people or businesses at artificially low rates is not the answer.

Cullion
26th October 11, 05:23 AM
What asset classes are profitable during a recession?

Depends on the type of recession. When lots of money is being printed, precious metals tend to do well.

When unemployment's going up, people tend to buy stuff that they can envision saving them money in the near future. Like kits for brewing their own beer, or stuff they need to get a vegetable going.

Lots of mainstream investors tend to move out of stocks into government bonds, because they see them as safer. This is likely to change.

indy007
26th October 11, 07:57 AM
Isn't this cited as a cause​ of the housing market downfall?

One of them. In the 80s home values artificially exploded. In LA for example, a house that should have been $200k inflated to $1.2 million. Unqualified person got a loan, bailed on it, bank gets stuck with a horrible, rapidly-devaluing asset (same home is now priced at $500k and falling).. so the bank turns around and sticks it to tax payers.

Spade: The Real Snake
26th October 11, 10:20 AM
Applying pressure on banks to get them to lend to people or businesses at artificially low rates is not the answer.

the argument from the Obama admin, as I read it, was that money being saved on the mortgage would be blown on other non-necessities, thus driving demand, thus driving all the sundry concepts of "jobs" associated therein

Cullion
26th October 11, 10:23 AM
Yes, it's a childlike misunderstanding of economics.

Why charge them interest at all? Why not just have the Fed print money to pay off people's mortgages for them ? They'd sure go out and buy stuff then, right?

Spade: The Real Snake
26th October 11, 10:30 AM
Yes, it's a childlike misunderstanding of economics.

Why charge them interest at all? Why not just have the Fed print money to pay off people's mortgages for them ? They'd sure go out and buy stuff then, right?

CULLION 4 PREZ

Cullion
26th October 11, 02:42 PM
You don't need to invest money for your retirement, we'll just print money to take care of that too. What could possibly go wrong?

Feryk
27th October 11, 10:30 AM
See, I KNOW you are saying that with sarcasm, but a large number of White House staffers are serious about that.

What Arhetton's post didn't really address is that the banks are killing themselves looking for QUALIFIED loan applicants. They have tightened their rules considerably, mainly because they want to be paid back. Unfortunately, they see no incentive to increase their portfolios of risk based assets.

Think about this from the banks point of view: they lost their asses on a bunch of loans that they KNEW were risky, but decided to participate in anyways (because of competitive pressures, government incentive, etc.). Needed (and got) a huge bailout. Now, they have a lot of cash (because people are hoarding it), but they know that this is temporary. When people feel confident again, they will want their cash back.

So, lending out against something you know will be gone relatively soon isn't really a good idea. Especially if it's in long term assets that are backed by questionable security (right now, EVERYTHING is questionable-especially real estate).

The banks are trying to be conservative, for a change. I believe this is also temporary (barring regulation), but they aren't going to change their lending policies until they are convinced that the recession is truly over - and that there is some stability in economic/fiscal policy from the Federal Government.

Cullion
27th October 11, 12:39 PM
They're waiting for the debt bubble to unwind. The debt bubble will have unwound when stocks have returned to some kind of normal dividend yield and real estate to some kind of normal multiple of median incomes.

The longer you stave this process off with printed money, the more people who will be sucked into investments that bankrupt them when the bubble unwinds. It is mathematically impossible to stave this off forever, so it's better to get it done with now.

Alan Greenspan should've let it happen in the late 90s.

Feryk
27th October 11, 02:27 PM
You mean the phrase 'Irrational Exuberance' wasn't clear enough?

Cullion
27th October 11, 02:57 PM
You mean the phrase 'Irrational Exuberance' wasn't clear enough?

He said it, and then kept interest rates low. I don't believe that Alan Greenspan saw no link between low interest rates and people going nuts borrowing money. You don't believe that either, do you ?

Dr. Socially Liberal Fiscally Conservative Vermin
28th October 11, 10:39 AM
http://a6.sphotos.ak.fbcdn.net/hphotos-ak-snc7/s320x320/318667_2366566096878_1632189067_2334636_598188223_ n.jpg

Robot Jesus
28th October 11, 06:51 PM
at this point I would assume banks are operating with more stringent internal regulation then is legally required.

Hedley LaMarr
28th October 11, 08:08 PM
at this point I would assume banks are operating with more stringent internal regulation then is legally required.
Sometimes I lie to myself to help me sleep, too.

jubei33
28th October 11, 10:18 PM
Latest pull will be this:

http://latimesblogs.latimes.com/money_co/2011/10/home-mortgage-refinancing-overhaul.html

So, the government is going to take up the risky portion of the loan.....wait no not the govt, I mean joe schmoe. Awesome, yet another bank bailout I didn't want.

250K house now valued at 150K, how do refinance? You get fannie mae to fuck everyone in the ass.

Cullion
29th October 11, 02:53 AM
To be fair guys, if you hadn't given them all this money, they wouldn't have any to lend you back and this would lead to chaos, possibly even martial law.


http://www.youtube.com/watch?v=HaG9d_4zij8

jvjim
29th October 11, 04:37 AM
I wish we could have martian law instead, like in that one episode of Sealab 2021.

jubei33
29th October 11, 07:08 AM
yeah? I'm interested, keep going. tell me more of this martian law.

jvjim
29th October 11, 11:09 AM
I DUB THEE SIR PHOBOS! KNIGHT OF MARS, BEATER OF ASS!

Robot Jesus
29th October 11, 02:05 PM
DOCTORS AND OTHER WIZARDS ARE BANNED UNDER MARTIAN LAW!!!

jubei33
29th October 11, 05:02 PM
Does this count towards doctorates as well?