For Too-Big-to-Fail Banks, the 78 Percent Solution

Photographer: David Paul Morris/Bloomberg

Today’s Bloomberg Credit Markets column kicks off with an extraordinary piece of data: U.S. banks are now holding $2 trillion more in deposits than they’ve loaned out. They’re lending just 78 cents for every dollar of deposits.

That’s a stunning number given the efforts the Federal Reserve has made to stimulate consumer spending and investment, and it tells you a lot about what’s happened with banking since the financial crisis. After all the discussion of “too big to fail,” a few banks are bigger than they ever were, increasingly profitable and more able to extract higher returns while lending out less money.

Take the case of credit cards — a good example of where borrowing stands in the current economy. Credit card delinquency rates are now at 2.83 percent; last quarter they were at 2.79 percent. These are the lowest delinquency rates since the Federal Reserve started tracking this in 1991.

The average rate that consumers pay on their credit card balances is now 13.22 percent. That is 13.06 percent above the federal funds rate. That spread — the difference between what a bank would pay to borrow from the Fed and what it collects in credit card interest — has averaged a little over 11 percentage point since 1994. In other words, delinquency rates are the lowest they have ever been. The federal funds rate is barely above zero. Yet the interest that banks charge credit card borrowers is almost exactly what it was a decade ago (13.29 percent).

What’s happening here? You can turn to a psychological explanation about banks’ reluctance to borrow; there may be some truth to that — credit does have boom and bust cycles. A more hard-headed approachis to look at the concentration of bank assets. At the end of 2001, the five largest commercial banks held 30 percent of U.S. bank assets. Now that’s up to 52 percent.

Depositors and borrowers are relying on an ever smaller group of big banks, and the lending decisions of those few banks are having an outsize effect on the national economic climate. Wells Fargo & Co.’s John Stumpf might say that he wants to lend out a dollar for every dollar of deposits he takes in, but in practice lending 78 cents (or 80 for Well Fargo) and keeping rates high seems to be pretty profitable.

For investors in the financial industry, this is a positive development. Bank of America Corp., for instance, has seen its share price double this year. Investors like Bruce Berkowitz who bet on a recovery for financial stocks seem to have been prescient.

For the economy, it’s not such good news. That low lending pace means that less of the Fed’s low-rate policy is evident in consumer borrowing and spending, and more in bank profits. As long as competition in banking continues to diminish, it’s not clear when or how that will change.

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