August 26, 2011

Banks Seek Relief as More Investors Move to Cash

Fear of double-dip recession cited as reason for increase in deposits

As more investors move to cash as a defensive move against another possible downturn, U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable. Bloomberg reports lenders in return are seeking relief on insurance premiums and leverage ratios.

“Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices,” according to the news service. “That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.”

Bloomberg cites three people familiar with negotiations between regulators and lenders, who say regulators have asked banks to take the deposits anyway, with one lender accepting $100 billion. The regulators want lenders to take the deposits because it improves the stability of the financial system, according to the sources, who said U.S. banks are viewed as places of strength.

“Some of the largest ones have talked with regulators about softening rules for ratios that measure capital and assets,” according to Bloomberg. “At least one asked for a waiver on paying higher premiums to the Federal Deposit Insurance Corp., which is less likely to be granted.”

“If the helicopter comes raining money on your bank and it’s only temporarily there, it could be excessively costly and disruptive,” said Robert Litan, a vice president of research and policy at the Kansas City, Mo.-based Kauffman Foundation, which promotes entrepreneurial business practices.

The news service reports cash held by domestically chartered U.S. banks, which includes Federal Reserve balances, rose to a record $1.02 trillion earlier this month, up 27 percent from the end of July last year. Deposits held by the 25 largest lenders expanded to $4.69 trillion in the week ended Aug. 10, up 8.5 percent from the end of May. The Fed’s balances advanced to $1.61 trillion as of Aug. 24, from $1.05 trillion a year earlier.

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