What Are Banks Doing With All That Deposit Money?
March 10, 2010
According to the recently released FDIC Quarterly Banking Profile, bank deposits rose by 13.5 percent, or $641 billion, in 2009. Savings accounts and CDs are selling well with a public that's tired of being buried in ever-mounting piles of consumer debt.
Businesses have also been putting increasing amounts of money into bank deposit accounts. Bank of America, for example, reported an increase of 24 percent in commercial deposits, to a total of $133 billion.
Under normal circumstances, it might be expected that banks would be lending out these deposits and/or seeking high returns through trading operations. But the uncertain economy has made both borrowers and lender beware. Politically, meanwhile, banks have been under a lot of pressure to stop trading with deposit money--thus the renewed interest in the Glass-Steagall "wall" between deposits and trading activities.
All this begs the question:
What are banks doing with all those deposits? They're not lending as much, and they're not trading as much, so what are they doing?
The answer appears two-fold:
1. Shoring up their capital positions, i.e. making sure that the bank is in a strong enough position to withstand the rash of non-performing mortgages, credit card loans, auto loans, etc. that is steadily developing.
2. Investing in low interest rate U.S. Treasury bonds.
In other words, banks may not be paying the highest rates on CDs and savings accounts right now, but neither are banks getting that great of a return on this money. Is that any consolation for low bank rates?
