Promissory Notes – Banking and Financial Perspectives, Issue 5 | Spilman Thomas & Battle, SARL
Welcome to our fifth issue of Promissory Notes – our electronic newsletter focused on banking and financial information. We hope you enjoy our monthly post.
From banks to businesses: more deposits, please –
“Some banks, inundated with deposits, encourage corporate clients to spend the money on their business or move it elsewhere.”
Why it matters: During the pandemic, near zero interest rates and loans from the Treasury Department allowed many companies to raise funds at low cost. Corporate clients flooded US banks with deposits, and they continue to do so today. Data from the Federal Reserve shows that between late March 2021 and late May 2021, bank deposits increased by $ 411 billion to $ 17.09 trillion, four times the average for the past 20 years. Additionally, corporate clients take a conservative approach to their investment strategy, holding onto these deposits and operating with higher cash balances, without planning to shift their cash to other income-generating investments and loans. The pandemic-driven corporate investment strategy is straining bank profit margins, loan-to-deposit ratios and capital ratios and disrupting bank balance sheets. Increasing deposits lowers a bank’s equity-to-assets ratio, making it more difficult for the bank to comply with minimum capital requirements set by regulators. Regulators have suspended some of these requirements during the pandemic, but the suspensions are now over. Many banks are now looking for ways to generate capital. Banking regulations restrict capital formation for banks, so alternatives to standard stock offerings are limited. The continued consolidation of banks in the United States has created growth opportunities for surviving community banks and small regional banks. These are the entities today most threatened by the growth of deposits and the growing demand for loans.
Please see the full publication below for more information.