Wednesday, October 9, 2013

Loans and Deposits - Why the Economy Isn't Growing

Here's a simple graph that goes a long way to explaining why the recovery has been so modest despite Mr. Bernanke's (and presumably Ms. Yellen's) Grand Experiment with interest rates:

The red line shows deposits with all commercial banks and the blue line shows loans and leases with all commercial banks in billions of dollars.  Notice that until the Great Recession, the growth level in both deposits and loans and leases rose in tandem.  It is quite apparent that the tight relationship between deposits and loans broke down in the early part of 2009.  

Here is a graph showing the loan-to-deposit ratio and how it has dropped to levels not seen since the early 1980s:

Right now, banks are only lending 76 percent of their deposits, a level last seen in June 1983.  Also note that the drop in lending-to-deposits is showing no sign of abating.

Let's flip loans and deposits around so that we end up with the ratio of deposits-to-loans as shown here:

Right now, banks are taking in $1.31 in deposits for every $1 that they loan to consumers and businesses.  This is up quite markedly from $0.98 in deposits for every dollar that they loaned in May 2008.

Here is a graph showing the excess of commercial bank deposits over the amount banks have loaned:

Between 1973 and 2009, the excess of deposits over loans never rose above $433 billion and was generally below $400 billion.  In contrast, in October 2012, deposits exceeded loans by $2.307 trillion, a new record amount. As you can see from the graph, the growth in deposits over loans is showing no signs of slowing down, a situation that looks very unhealthy.

So, what is it that banks are doing with the $2.3 trillion in deposits that they are not lending to consumers?  Here is a look at the same loans and leases curve (in blue) with the reserve balances held by the Federal Reserve Banks (in red):

More than 6000 depository institutions maintain balances at the Federal Reserve Banks in reserve accounts.  In October 2013, banks had just over $2.311 trillion on deposit with the Federal Reserve.  This is money that is not loaned out and, in fact, after 2008, the Federal Reserve paid interest on these reserves.  By paying interest on reserves, the Fed could both increase the level of reserves and maintain control of the federal funds rate by permitting the Fed to expand its balance sheet to provide the necessary liquidity to support financial stability.

Just before the Great Recession, the required reserves (in red) averaged about $43 billion as shown here:

As you can see, that level changed once the Fed started paying interest on banks' reserves which have grown to a level in excess of $2.3 trillion, a 5350 percent increase in five years!  As you can see on the black line which shows excess reserves, banks are using the Fed as their own bank largely because, since 2008, the interest paid on both required and excess reserves has stood at 0.25 percent, a completely risk free return particularly when compared to loaning to consumers and businesses.  Prior to 2008, the Fed was not obligated to pay any interest on bank reserves, providing the commercial banks with absolutely no motivation to deposit excess monies with America's central bankers as shown here (in purple):

From the data presented here, it certainly appears that the Federal Reserve's policies are working against economic growth.  When banks stop lending, the economy stops growing and the Fed appears to have made it way too easy for the commercial banks to invest in lower risk activities.


  1. I wish to ask for a favor. Would you kindly do a blog on total amount of Derivatives and futures trades that has been conducted? By my estimate the total GDP of world versus the futures/derivatives trade is seemingly distorted by great margin. Bankers are hiding this truth behind complex terms. Hence this saving of 2 trillion dollars will seem peanuts when placed alongside that trade.

    1. According to the Office of the Comptroller of the Currency’s fourth quarter report for 2011, about 95% of the $230 trillion in US derivative exposure held by four US financial institutions: JP Morgan Chase Bank, Bank of America, Citibank, and Goldman Sachs. The Derivatives Tsunami is the result of the handful of fools and corrupt public officials who deregulated the US financial system. Today these four US banks have derivative exposure equal to 3.3 times world Gross Domestic Product. This is something beyond science fiction or anything that can be comprehended, more below,

  2. Great blog and very insightful. Lack of good borrowers or resistance to lending? I think both.

  3. The excess reserves are despite Federal Reserves interest rates of 0.25%. If that was halved I doubt the reserves would change much.
    The major focus should be on policy uncertainty. Most economists either admitt they don't understand what is going on or is very very much against what is currently being done by the Fed. Everyone sees bad times ahead, like Japan 1990's.
    The banks are still trying to figure out their next move. Which I think will happen sooner than latter, they will pump that money out, and soon it will flood the market. The Federal Reserve will have to put rates back to two digits but I doubt that will make much of a difference. An inflation rate of 20% should be expected after that. Would make an incredible economic boom, and an epic burst when it runs out.

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  5. A commonly used statistic for assessing a bank's liquidity by dividing the banks total loans by its total deposits. More information is available on their web site at

  6. The red line shows deposits with all commercial banks and the blue line shows loans and leases with all commercial banks in billions of dollars. home equity

  7. Analysis is correct above, but the new rules by the governement do not allow bank's to lend this cash anyway.