Banks' gap between loans, deposits is wider than ever

NEW YORK - Deposits at U.S. banks exceed loans by an unprecedented $2 trillion as the threat of a slowing economy tempers borrower demand and lenders preserve tightened standards.

Cash deposited at firms from JPMorgan Chase & Co. to Bank of America Corp. expanded 8.7 percent this year to a record $9.17 trillion through Dec. 5, Federal Reserve data show. That outpaced a 3.7 percent gain in loan assets to $7.17 trillion. The gap between what banks take in and lend out has surged since October 2008, the month after Lehman Brothers Holdings Inc. collapsed, when loans exceeded deposits by $205 billion.

U.S. consumers continue to cut debt loads, while banks tighten lending practices that fueled the credit bubble in 2007. The fiscally sensible moves have an unintended consequence: They are undermining efforts to stimulate the economy by the Federal Reserve, which has sought to spur spending by holding its benchmark interest rate at almost zero for four years. The low rates are limiting investment options, making savers content to hold their cash at lenders, according to Royal Bank of Canada's Gerard Cassidy.

"Borrowers are still deleveraging, so the demand is not at the level it would be in this part of the recovery," Cassidy said. "That, combined with the low-rate environment, has led to this unintended consequence."

The banking industry is lending 78 cents for every $1 it holds in deposits, below the mid-90 percent range cited by Cassidy as "optimal." Wells Fargo & Co. Chief Executive John Stumpf told Fortune magazine last month that he tries to run the company with $1 of deposits funding $1 of loans. The bank was at about 80 cents for every dollar through September, for a loan shortfall of about $200 billion, Stumpf said.

The tepid growth in bank lending contrasts with the unprecedented pace of borrowing in corporate bonds, where investors are accepting both record-low rates and looser protections to boost returns. Companies with access to capital markets, from medical-device maker Abbott Laboratories to brewer Anheuser-Busch InBev NV, have sold $3.9 trillion of that debt this year, up from $3.29 trillion last year, according to data compiled by Bloomberg.

Deposits have surged 29 percent from $7.1 trillion in September 2008, when Lehman filed for bankruptcy and sparked a seizure in credit markets. Loans have increased by less than 2 percent in the same period, Fed data show.

"Companies are sitting on large stockpiles of cash, and that just gets piled up and sits on bank balance sheets," Pri de Silva, a bank analyst at New York-based CreditSights Inc., said in a telephone interview. "They're not investing, so the need for bank loans has come down on the corporate side."

That's coincided with tighter lending standards for consumer loans such as mortgages, with banks more cautious than before the financial crisis, de Silva said. "Loan growth has been anemic to say the least," he said.

Less than 10 percent of U.S. banks relaxed underwriting conditions for large, middle-market and small companies during the last three months, according to responses to the Fed's Senior Officer Loan survey in October. In the central bank's most recent Beige Book business survey, homebuilders cited "tight" underwriting as a reason why they and home buyers haven't been able to take full advantage of low interest rates.

Household debt

"Small fractions" of U.S. banks reported easing lending rules on business loans and some categories of consumer debt, the Fed said in the loan survey. Underwriting standards for mortgage lending were mostly unchanged, according to the survey.

Household debt dropped to 20 percent of assets as of Sept. 30, down from 21.5 percent last year and a peak of 26 percent in 2008, Deutsche Bank analysts led by Matt O'Connor wrote. That deleveraging should continue through 2013 as the measure moves toward its historical average of 18 percent.

While "a ramp-up of growth" in loans is possible by late 2013, it's "difficult to have much conviction" in an expansion with the private sector likely continuing to trim debt loads, the analysts wrote. "We don't expect a meaningful pick up in loan demand" in the near or medium term.

Borrowing costs have plunged in the four years since the Fed lowered its benchmark lending rate to between zero and 0.25 percent in an effort to prop up economic growth that's forecast to drop to 2 percent next year, from 2.2 percent in 2012, Bloomberg data show.