Deposit glut weighs on regional banks

A pair of regional bank CEOs addressed head-on two major issues tied to the industry’s deposit glut: How will it affect already lukewarm loan demand, and how worried are banks that deposits will flow out as quickly as they poured in?

Excess deposits have accumulated since last spring, and potential borrowers appear to have so much cash on hand that they may not need loans, Zions Bancorp. Chairman and CEO Harris Simmons told investors during Keefe, Bruyette & Woods’s virtual Winter Financial Services Symposium that began Wednesday.

“You’re not going to borrow if you have the cash,” Simmons said.

While he views some commercial deposits as temporary, M&T Bank Chief Financial Officer Darren King at the same conference tried to be more reassuring about the stability of deposit levels. The $142.6 billion-asset company saw noninterest bearing deposits grow to $47.6 billion at the end of the fourth quarter, an increase of 47% from the same quarter in 2019.

The deposits “are probably stickier than people think, and the reason I say that is if businesses are going to spend their cash on hiring, it’s going to end up in consumers’ accounts in the form of wages,” said King, whose company is based in Buffalo, N.Y. “If they’re going to spend that money in retail, it’s going to end up in retail accounts, and that will end up in the banking system.”

Banks across the industry continue to grapple with a surge in deposits, which totaled $16.3 trillion as of Jan. 27 — up another $100 billion since the end of December, according to the latest data from the Federal Reserve.

The Biden administration’s push for a third round of stimulus could pump another $1.9 trillion into the economy, a move that would inject even more liquidity into the system.

So far, banks are finding few ways to put the money to work. Lending forecasts are dim, with many bankers saying they don’t expect a pickup until the second half of the year.

Another potential consequence of so much cash could be an uptick in the price of goods and services, Simmons said.

“I have a real belief that the great risk out there continues to be inflation,” he said. If the cash starts to circulate, “it’s just the physics of monetary theory [that] suggests that it’s going to be inflationary, to me anyway. That ought to be the concern for all of us, that we're positioned for that kind of scenario.”

The $81.5 billion-asset company, which is based in Salt Lake City, is putting some of the excess cash into short-term securities.

“I do think a lot of this is transitory,” Simmons said. “Again, a lot of this is stimulus. In our case, we’ve done a lot of Paycheck Protection [Program] loans, and we’ve seen a lot of that cash sitting on the balance sheet that will get spent.”