Why aren’t banks lending much money?

One of the topics that investors regularly ask us about involves lending. Most questions these days seem to focus on portfolio lending… most investors can’t understand why banks are so loaded with cash but unwilling to lend much of it.

Recently President Obama’s top economic adviser, Larry Summers, shared his idea on how to increase the velocity of money in a speech he gave a few weeks ago at the IMF Research Conference. His best advice: Quit paying interest to the banks on reserves held at the Fed. What a novel idea! Maybe then the banks would actually act like banks and not Hedge Funds swimming in free cash.

So how did the bankers respond when they heard the crazy idea that their free lunch might be taken away…?  They didn’t like it. In fact, executives at two of the top five US banks said that if the Fed cut the interest rate on the $2.4T of reserves currently held at the Fed, that they would pass that cost on to their depositors. This Financial Times article tells the whole story.

What exactly does that mean?  It means your bank would charge you to have an account held at the bank! It does not seem that long ago when we all used to get at least a little bit of interest on our savings accounts… Now we are entering a world where you might pay the bank for the privilege of depositing your money there.

By the way… this is an idea that we at Conscient Capital have had our eye on for a while (see our article in Financial Consultant magazine, page 4): “Goldman forsees a time when investors will not earn interest on their money, but instead be charged a fee for a financial institution providing a safe place to store it. This is already happening in some parts of the world.”

Will this scenario be a reality in the near future? It’s still hard to say. Maybe a better question to ask would be: Why would the banks rather charge their depositors rather than simply make loans? Isn’t that what banks are supposed to do?

How would you react if your bank asked you to pay them to hold your money?

Categorized in: Blog

This post was written by Conscient Capital