Due to the effects of the pandemic, American corporations have not only not kept astronomical amounts of money in banks, but they have also been reluctant to use this money or make loans, which prevents the banks from generating profits from the loans.
This has affected the margins of banks in the United States, which are already asking their corporate clients to reduce the amount of deposits and do something with the billions of dollars they have in their bank accounts.
Although banks expected that with the reopening of the economy companies would have a greater need to make use of this money, deposits continue to increase, with no sign that this money will be used in the short term.
From the beginning of the pandemic to the present, according to data from the Federal Reserve (FED), commercial deposits in the United States have grown by 30.4%, from $13 trillion to more than $17 trillion.
Why won’t banks accept more corporate deposits?
Normally high deposits are not a problem for banks, as long as there are loans to be made. However, the pace of lending has slowed and companies have preferred to borrow from their investors, rather than borrow from banks. In fact, lending as a percentage of total deposits equals 61% by May 26, 2021, coming from 75% in February 2020.
The point has reached such a point that some banks have invited their corporate clients to consider other options to do with their money, instead of depositing it in their banks.
One of the main problems faced by banks is the requirement imposed by the Fed to hold equity capital equivalent to 3% of the total assets they manage. Although this restriction was lifted during the pandemic, at the end of March the rule was re-imposed and with increasing deposits banks are having trouble maintaining the requirement.
Other banks have opted to offer their clients lower returns on their deposits or suggest that they move part of their funds to smaller banks.
Some banks, such as BNY Mellon, have opted to move part of their clients’ deposits into the foreign exchange market, which have become common investments. Movements in foreign exchange markets have grown precipitously in recent months, moving as much as $4.61 trillion.
For Gloria Tamayo, professor of finance and master of the Sorbonne University, “what the situation reflects is a gigantic excess of liquidity in the economy, where capital and companies don’t believe that the recovery is going to happen so fast, because employment has not grown at the expected rate.”
“Being a global economy, the problem is not only that the United States grows, but the global economy to increase production for exports,” explains the professor. “The liquidity crisis will not only be reflected in a rise in inflation, but in unproductive money waiting for the world economy to recover, where what will happen is that the profit levels of companies will not be as high, since they have not reached their full production potential,” she added.