Why you should care

Whether you’re seeking a loan or a new job, skittish banks hoarding deposits are making that harder than it should be.

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The U.S. economy is showing signs of having a breakout year in 2014. Now if only the money lenders would get on board.

Consumer spending may account for 70 percent of economic activity, but it’s bank lending — to whom, where and to what degree — that drives economic growth. Despite rising GDP and falling unemployment through 2013, U.S. banks remain tightfisted with trillions in deposits entrusted to them to hold and deploy.

Loan-to-deposit ratio: The percentage of deposits that banks issue in loans is a function of how much risk they care to take; too little and profits suffer, too much and they may have insufficient funds to cover bad loans.

”They did get burned, so the risk-taking culture has certainly changed and they want to keep their default rates low,” says Christopher Whalen, banking analyst for Carrington Holding Co. ”But they’re almost not making enough loans to keep up with the runoff.” That is, loans are being paid off faster than new loans can be drawn up.

Consider this, from the FDIC’s latest Quarterly Banking Profile: U.S. banks collectively held $11.02 trillion in total deposits — and had just $7.65 trillion outstanding in loans and leases. That 69.4 percent loan-to-deposit ratio is well below the 80- to 90-percent level industry analysts like to see — and far below the nearly 100 percent over-extended rate seen in boom times, when banks trip all over each other to lend every cent they can, often at extremely risky terms (think of all the easy loans being doled out at the height of the housing bubble).

And who suffers from the industry’s miserliness? Individual borrowers of all types…

That means the industry is sitting on the remaining $3.37 trillion: What are they doing with it, if not putting it in mortgage, construction, education, auto, credit-card and large- and small-business loans that could be fueling economic expansion?

They’ve parked it all in low-risk investments such as tax-free municipal bonds and U.S. Treasury bills — the type 80-year-old retirees hold to preserve their savings.

And who suffers from the industry’s miserliness? Not just the economy but individual borrowers of all types who could benefit from tapping the cheapest money ever available from the Federal Reserve Bank — if only banks would put depositors’ stockpiled trillions into circulation.

”Interest rates are low and yet lending hasn’t increased dramatically,” says Stephen Hoopes, an industry analyst with IBIS World. “They’re not lending to the extent they could.”

For Every Action…

The industry has ridden the risk pendulum far in the opposite direction from where it swung prior to the 2008 financial collapse. Back then many banks cared so little about risk they made billions in mortgage loans based almost solely on borrowers’ credit scores, without even confirming they had jobs or financial assets.

The question is, what will compel bankers to loosen up the money spigot?

Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which brought the hammer down on such laissez-faire lending, has made many banks wary of being fined millions if they breach today’s tighter loan-underwriting guidelines and consumer safeguards.

Yet industry analysts such as the outspoken Mike Mayo of CLSA Americas have taken megabanks like JPMorgan Chase and its chairman and CEO, Jamie Dimon, to task for anemic loan growth amid a rebounding economy. The question is, what will compel bankers to loosen up the money spigot?

Bright Spots on the Horizon

Several lending markets picked up in the latter half of 2013, Whalen says, including auto loans that helped boost U.S. car sales to 15.6 million, the highest level since 2007. And the December approval rate for small-business loans rose 17.6 percent from a year earlier, says Hoopes, adding that the outlook for established small businesses should further improve because banks approve such loans based on three years of financial data, so no need to open up the books from the dark days of 2009 and 2010.

Obama with Barney Frank and Christopher Dodd after signing the financial reform bill.

Source Corbis

The recent mortgage-refinancing drop will also force banks to seek other lending markets to put sidelined deposits to work in 2014, Hoopes says. ”They’re definitely looking for other income streams with the refi business hurting now.”

With U.S. consumer confidence near a 5-1/2 at year’s end, the economy’s prospects may well ride on bank executives’ confidence that the expansion is worth investing in. Unemployment fell to 6.7 percent in December — its lowest level in five years — and the economy grew a searing 4.1 percent in the third quarter. If that improvement continues and loan growth doesn’t pick up, bank executives may find themselves hauled in to testify before Congress about their not lending practices.

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