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Banks Really Do Have Too Much Money

Once upon a time, like within my adult lifetime, banks operated on a very simple system. People deposited money. The bank paid them interest on that money, let’s say 3%. The banks then used that money to make loans to other people, charging them, say 5% interest. Money in, money out, interest paid, profit made. Very, very simple process. Banks, by law, had to have a certain amount of “capitalization” – money on deposit with which to fund loans. They could also entice a second form of savings account, the minimum balance checking account, to beef up their available funds for making loans. When banks had more out than in, they could borrow more money, or they could failed and since the creation of the FDIC, that did not hurt their customers.

 Then things went all pear shaped with funky new laws and flimsy regulation and banks started “investing” their money to increase their profits even more than their seemingly never-ending list of fees and charges could, and we ended up with this financial meltdown.

 The financial meltdown, uncertainty over the stock market and a desire to save instead of invest have created a very thorny problem for the banks. They have too much money.

 Once, during our periodic career moves, my husband had gone ahead to his new post while the children and I finished the school year. His paychecks were direct deposited, for a while at our old location and then at our new one. He would send me a check for my expenses. One day, I went to our bank, where we still had an account, and cashed his check. I was informed by a branch manager that the bank was not in business to process our money. Okay, so what were they in business for?

 Apparently, they are no longer in the business of holding deposits, making loans and charging more interest for the loans than they pay out for the deposits. They haven’t started actively turning away depositors, but they aren’t encouraging deposits, particularly large deposits being moved in and out of a bank. In August, Bank of New York Mellon said it was going to charge a 13% fee for these large in-and-out transfers.

 JPMorgan Chase, U.S. Bancorp and Wells-Fargo as passing along federal deposit insurance costs to their small business customers. Even small banks are not overly thrilled with large depositors. Don Sturm, the owner of American National Bank and Premier Bank, a 43-branch bank in Colorado and three neighboring states, told The New York Times “We just don’t need it anymore.” Like Hyde Park Savings Bank in Boston, Sturm’s banks have lowered the interest rate for CDs this spring. Hyde Park lost 1,000 of its 35,000 CD holders with that move.

 Why don’t they need our money? Easy. They are not making loans. Small businesses and those wishing to buy homes have been complaining for the past three years that credit lines have dried up and banks aren’t lending. My bank shut down the available credit lines on revolving loan accounts. They don’t want to lend money, no matter what the potential borrower’s credit score, so they don’t need to be holding a lot of it. Unless they lend money, they cannot earn the interest that pays the interest on savings.

 Take Wells Fargo, for example. They are holding $41.8 billion in deposits, but will only make $8.2 billion in loans this year. By closing down revolving credit lines for small businesses, the banks have it impossible for them to finance purchases of supplies in advance of need. By not lending money to small businesses, they prevent expansion or upgrade. By not funding mortgages, they are cutting off the possibility of selling off those foreclosed homes or financing new homes. As Thornton Wilder said, “Money is like manure. It’s not worth a thing unless its spread around encouraging young things to grow.” So, why are the banks hoarding the shit?

 The banks are blaming the Federal Reserve. By keeping interest rates low, the Fed has undercut the profitability of the deposit-savings circle. How’s that for bullshit? My revolving credit line was set at a certain percentage above the Fed’s prime rate. The absolute least my bank earns on that credit account is still over 9%. But, Hyde Park’s CEO, William D. Parent, claims that “It’s very hard for us to take deposits and make any meaningful spread (the difference between interest in and interest out.)” Oliver Warren, a financial services consulting firm, says that banks’ deposit revenue will shrink more than $55 billion, which is far more than the losses in fees from the new regulations.

That statement makes no sense whatsoever to this poor dumb schmuck. Banks are supposed to get their revenues from the interest they collect from loans, not from deposits, aren’t they? When Chris Kotowski, of Oppenheimer, explains that “If you can’t put the money to work, what are you going to do with it? You’re sending monthly statements, you’ve got people at branches. All that stuff costs money.” So, banks are closing branches and laying off workers, but the only thing keeping them from making money is their decision not to lend it, isn’t it? Today, the average CD rate is less than 0.4%, when it used to be 3%. Why? Our banks have more than $8.9 TRILLION in deposits. What are they doing with it, using it for wallpaper?

Well, Don Sturm has cut two-thirds of his banks loans, now holding only $500 million in loan accounts. His bank cut back on mortgages in Telluride and Aspen. His bank has $1.55 billion in deposits and he won’t give a mortgage to some hedge fund manager who wants a million dollar house in Aspen with 50% down. What kind of business management is this? Sturm claims that he wants to make more loans, but his criteria for a borrower sounds like he’ll only lend to people who don’t really need to borrow. So, Sturm is keeping savings interest below 0.15% and CD rates almost as low, saying “I don’t want to take deposits in and lose money.”

If you don’t want to lose money, Mr. Sturm, try earning it by making loans. That’s how banks are supposed to make their money, not on ATM fees and overdraft fees and servicing fees for checking accounts. It’s Banking 101 – to make money you have to lend it.

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