ABA Data Bank: Explaining the Deposit-Loan Divergence

By Hugo Dante

Banks have seen record growth of deposits since the beginning of 2020; up about $4 trillion or 27 percent. However, over the same period, bank lending rose only $307 billion or 3 percent.

Banks have seen sharp drops in lending in some categories. Most notably, credit card and home equity lines are both down approximately 20 percent, and agricultural production loans are down 14 percent since the fourth quarter of 2019. Additionally, since peaking at $3 trillion in April of 2020, C&I borrowing by businesses declined by more than $500 billion as businesses steadily deleverage, spinning off large credit lines. Though some forms of lending have seen modest growth since the end of 2019—those for construction and development, businesses, municipalities and consumer lending for home improvement and automobiles—the overall effect has been bank credit not keeping pace with deposits.

Historic growth in bank deposits and flat lending share a common cause: government payments and excess liquidity. Government spending to address the steep COVID-19 recession totaled more than $3 trillion out of $3.5 trillion authorized, more than offsetting lost income from lockdowns and unemployment. Much of this went directly to consumers and businesses in the form of stimulus checks, expanded unemployment insurance, and PPP loans (of which banks distributed 70 percent).  The outcome was a sharp annual increase in real personal income and more than $2 trillion in excess savings by households.

Households and businesses used the funds to pay down debt. Consumers paid off more than $180 billion in credit card debt and $56 billion in home equity lines, dropping debt service ratios to record lows. Businesses reacted similarly, paying down credit lines and buying back debt. With the economy recovering from deep recession, households and businesses have held off on spending and investments, limiting financing needs. Banks have sought opportunities to deploy the deposit funds into loans by continuing to ease standards as the recovery progressed, but demand has been tepid.

Challenges in deploying liquidity are not unique to the banking industry. Households, businesses and institutional investors are sitting on large cash balances. However, supply chain bottlenecks, a product of the global shutdowns and disruption caused by the pandemic, have limited the stock of available goods and materials and dramatically raised the cost of inputs. Widespread labor shortages have challenged various sectors, most prominently the airline and hospitality industries, leading to flight cancelations and forcing some businesses to close. This environment has created limited opportunities to find return-generating investments, driving down yields for securities of all types to record lows, with even junk bonds, “the asset class formerly known as high-yield”, yielding below inflation.

Facing an environment in which options for yield are limited, depositors have continued to pour deposits into the banking industry, with non-interest-bearing deposits making up the largest share of new deposits (approximately 60 percent of the more than $640 billion in new deposits in the first quarter of 2021).

Banks have faced challenges in quickly deploying this excess liquidity, growing cash balances by $2 trillion or 118 percent and purchasing $1.5 trillion in securities, mostly government-backed in the form of GSE mortgage-backed and U.S. Treasury securities. Banks are challenged to find sound lending opportunities that earn higher returns than those of the low-yield assets they have added to their balance sheets.

As the economic recovery progresses and strengthens, banks will continue to safeguard their customers’ deposits and stand prepared to finance the turnaround.


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