Banking Connects Blog

A rather strange problem is taking center stage in the banking industry today; there is too much money in the banks. For example, money in the bank is typically a good thing, but only to a degree. Banks generate revenue by investing customer deposits into other areas, such as lending, home purchases, expansion plans or using it to finance new businesses. With scores of customers growing increasingly anxious about safeguarding their money, more and more are using banks as giant piggy banks where they can store money inevitably in a stable environment. In other words, money is sitting in banks without letting them invest it in other sources, which in turn doesn’t stimulate the economy.

Consider that Wells Fargo allocated approximately $8.2 billion in deposits to finance new loans out of the nearly $41.8 billion accumulated in the third quarter.

Bank owners are turning to creative methods in an attempt to detract customers from storing money in their banks. For example, some known banking names, such as Wells Fargo and JPMorgan Chase, are transferring a fraction of the federal deposit insurance charge to some of their small business clientele with the hopes of, kindly, letting them take their business elsewhere. Earlier this year, Bank of New York Mellon notified customers of a new fee of 0.13 percentage points of some of the clients using the banks as cash storage centers. While banks are not typically keen on turning away customers from standard banking processes such as bank deposits, their goal is to get things back on track with as indirectly as possible and avoiding a slap on the wrist, even a weak one.

Generally speaking, this is largely unheard of, especially for community banks grappling with the large influx of money that has created a surplus within their safes and vaults. According to Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LLP, "The bottom line is that it hurts your margin if you get a lot of deposits and have nowhere to put them. The margin is the one thing banks are used to controlling, so it requires behavior modification to tone down an appetite for deposits." Hyde Park Savings Bank, a community lender in the Boston area, reduced its customer base of C.D. holders from 35,000 to approximately 1,000, encouraging customers with a checking or savings account to stay on board.

Data suggests that this set of changes has been affecting banks for the last two years, over which the average loan-to-deposit ratio dropped from above 105 percent to 94.1 for the 15 leading banks by the middle of 2010. In short, banks have been lending money more than customers have been depositing it. So rather than banks floating a loan, customers continue to float alone.