Banks Navigate Surging Deposits, Tepid Loan Activity Since COVID-19
By Carl White, Senior Vice President of the Supervision, Credit and Learning Division, Federal Reserve Bank of St. Louis
According to the Conference of State Bank Supervisors’ 2019 National Survey of Community Banks, the main challenge for community banks was the availability and cost of funding. Interest rates had recently risen, increasing the cost of deposits and prompting more reliance on wholesale funding. Slightly more than one-third of surveyed bankers said the cost of funds was the factor most likely to influence future profitability, ahead of loan demand, operating costs, loan rates, and regulatory costs. The availability of core deposits was a persistent problem exacerbated by a proliferation of new entrants and technologies into the banking system.
SOURCE: FFIEC Reports of Condition and Income (call reports).
• 20 •
• January-February 2022
Then came COVID-19 and a rush of deposits. The influx in early 2020 can be traced to companies drawing down credit lines, the distribution of federal emergency stimulus funds, and a slowdown in consumer spending. Although deposit growth has recently slowed as the economy has improved and consumers have resumed spending, many banks remain flush with low-cost funding at a time when loan demand remains tepid and returns on other investment opportunities remain low.
A COVID-Fueled Deposit Surge The turnaround in deposit growth has occurred among banks of all sizes. In the year before the pandemic, total deposits increased 4.7% at all U.S. banks. In 2020, they increased more than 20%.
