Sonders: ‘Animal Spirits’ May Get Banks to Start Lending Again

In her preconference session Sunday night at the Schwab Impact conference in Washington, Liz Ann Sonders displayed a telling slide showing the widening gap among U.S. banks between their high levels of deposits, which have been “soaring, thanks to the Fed,” and their stubbornly low levels of actually making loans.

So what will lead banks to start lending?

In an interview the following day, Schwab’s chief investment strategist suggested that it may turn out that “animal spirits will shake the banks loose.” She argued that banks are already in “pretty loose territory,” and that “if your competitors are lending you’ll start lending.” She said that overall, the banks were “in great shape,” there there was “plenty of pent-up demand,” and that the rules were “not yet written” on Dodd-Frank implementation of stricter bank regulation.

She also indicated that home prices would “probably boom” in the fourth quarter of 2013, though she didn’t specifically tie that rise to any forecast of increased bank lending. However, if the banks do start lending, that could be the “next positive surprise” for the markets and economy. She tempered that optimism with a caveat, saying it “could be problematic” if velocity picks up, which could then “run the risk of inflation.”