Banks handling record influx of deposits, economic uncertainty

Community banks say they are facing challenges from an influx of deposits and a lack of business investments due to ongoing economic uncertainty surrounding the progression of Covid-19.

According to the American Bankers Association, banks have seen a record increase of deposits since the beginning of 2020, up about $4 trillion or 27 percent. However, over that same time, bank lending rose only $307 billion or 3 percent. Banks have grown cash balances by $2 trillion — 118 percent — and purchased $1.5 trillion in mostly government-backed securities in the form of Government-Sponsored Enterprise mortgage-backed and U.S. Treasury securities. 

Banks have also seen sharp decreases in lending in some categories: Credit card and home equity lines are both down approximately 20 percent, and ag production loans have decreased 14 percent since 4Q 2019. Additionally, since peaking at $3 trillion in April 2020, business commercial and industrial borrowing has declined by more than $500 billion as businesses steadily deleverage, spinning off large credit lines. The modest growth of lending for construction and development, businesses, municipalities and consumer lending for home improvement and automobiles has not been enough for bank credit to keep pace with deposits. 

Sharon Presnall, Iowa Bankers Association senior vice president, government relations/compliance, said those current trends are the reverse of a few years ago, when banks sought more liquidity. She noted many banks have loaned Paycheck Protection Program money during the pandemic, increasing liquidity. 

Though Presnall said Iowa banks are doing well financially, she expects next year will be more challenging unless borrowers begin planning expansions and undertaking other projects. Additional widespread shutdowns due to the delta variant of Covid-19 could bring further economic challenges and reduce the chances of needed business investments. Still, Presnall said higher ag prices are a silver lining to the current situation. 

According to the ABA Data Bank, flat lending and historic deposit growth stem from the more than $3 trillion in federal government payments to address the recession. Though that money more than offset lost income from lockdowns and unemployment, much of it went directly to consumers and businesses in the form of stimulus checks, PPP loans and expanded unemployment insurance. That resulted in a major annual increase in real personal income and more than $2 trillion in excess household savings. Consumers paid off more than $180 billion in credit card debt and $56 billion in home equity lines, dropping debt service ratios to record lows. Businesses reacted similarly, paying down credit lines and buying back debt. As the economy has recovered, households and businesses have held off on spending and investments, limiting financing needs.

Supply chain bottlenecks, also seen as a product of the global shutdowns and disruption wrought by the pandemic, have limited the stock of available goods and materials and dramatically raised the cost of inputs. Widespread labor shortages have challenged many sectors, including the airline and hospitality industries, causing flight cancellations and forcing business closures. This environment has created limited chances to find return-generating investments, driving down yields for securities to record lows, with even junk bonds yielding below inflation, ABA said.