Loan-to-deposit ratios at many community banks are up. In the old days, that meant loan demand was strong. But in today’s environment, we know it likely means deposits are drying up.
It is ironic that at a time when banks are struggling to fund loans, there is so much focus on controlling the credit allocation process. The recently revised (and delayed) Community Reinvestment Act requires banks with more than $2 billion in assets to define their markets along county lines — no more lending to portions of any one county. This rule is an attempt by policymakers to require those banks to make loans in areas where they currently don’t lend.
Or, consider Section 1071 of the Dodd-Frank Act, which is attempting to turn the Equal Credit Opportunity Act into CRA for small businesses. The emphasis now is on data gathering, but what do you think they are going to do with that data? It almost certainly will be used to make the case that banks should be lending more to some folks defined by geography or other identity group.
And, then there is always the threat posed by the Department of Justice, which has a history of beating up on banks for disparate impact when it comes to lending patterns. If the DoJ determines the boundaries of a bank’s market area to be too selective, the bank is going to have to make loans in new areas.
Since lending is such a priority with progressive policymakers, perhaps they could be persuaded during prolonged periods of elevated interest rates to make funding more readily available to banks so they can make more loans. The Paycheck Protection Program was, in essence, a bank deposit program, but it provided that funding when much of the economy was shut down and no one needed a traditional commercial loan. PPP swamped the system, and we don’t need anything so dramatic this time around. But what banks could use is low cost money that helps them keep up with existing and potential loan demand. Maybe something like a revised version of the Bank Term Funding Program, only instead of helping banks meet depositor demands, it would help banks meet borrower demands.
My point is unless policymakers help banks access deposits, they really should not tell bankers where they ought to be making loans. Rather than coercing banks to meet their opaque, politically-motivated credit allocation goals, policymakers should leave bankers free to exercise their judgment as guided by transparent market influences.
