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Banks to Companies: No More Deposits, Please:
U.S. companies are holding on to billions of dollars in cash. Their banks aren’t sure what to do with it.
When the coronavirus pandemic hit last year, corporate executives rushed to raise money. Banks have been holding that cash ever since, and because companies are reluctant to borrow from them, they can’t turn it into income-generating loans. That has weighed on banks’ profit margins, and some have started pushing corporate customers to spend the cash on their businesses or move it elsewhere.
Bankers say they thought the improving economy would reduce companies’ desire for holding cash, but deposit inflows have continued in recent weeks. Chief financial officers and treasurers, many still wary of the pandemic’s impact, say they aren’t ready for big changes, even if they earn little or nothing on their deposits.
[...] Top of mind for many big banks is a rule requiring them to hold capital equivalent to at least 3% of all assets. Worried about the rule’s impact during the pandemic, the Fed changed the calculation in 2020 to ignore deposits the banks held at the central bank, but ended that break this March. Since then, some banks have warned the growing deposits could force them to raise more capital, or say no to deposits.
(Score: 2) by JoeMerchant on Tuesday June 15 2021, @10:03PM (3 children)
Oh, trust me, that's in the plans already. Pandemic impacted sales and performance targets mean extra large bonuses when "expectations are exceeded," and beyond that there are bigger and bigger perks in store for the upper echelons, particularly those who very publicly sacrificed their bonuses for 2020.
Now, if I'm obtuse then please explain like I'm five, but... if banks are required to keep 3% of their deposits in capital equivalent, aren't these deposits 100% capital equivalent? I mean, they can't loan them out because there are no takers for the loans, so I get that they may be losing money, but it seems like they would be beating that 3% rule in spades. It also seems like that 3% rule may be far far too low if these companies "run on the banks" taking cash out all at once in the near future.
🌻🌻 [google.com]
(Score: 1, Interesting) by Anonymous Coward on Wednesday June 16 2021, @12:45AM (2 children)
No, they are not capital equivalent. Deposits are a liability, not an asset, from the bank's point of view. This means that each deposited dollar decreases their capital equivalents.
It is also worth pointing out that the capital equivalent requirement is not the same as the reserve requirement for depository institutions.
(Score: 3, Interesting) by JoeMerchant on Wednesday June 16 2021, @01:29AM (1 child)
Sorry, the five year old in me doesn't understand.
These deposited dollars aren't going into depository institutions? Or, are they also depository institutions subject to the reserve requirement too?
I get that a deposit presents as a liability on the balance sheet, but the five year old in me wants to know where that deposit went, and why it is not fungible with capital?
🌻🌻 [google.com]
(Score: 0) by Anonymous Coward on Wednesday June 16 2021, @03:02AM
Because the Capital Equivalence rule is based on a modified balance sheet. Basically, it is the modified equity of the bank which is composed of the money that is not subject to the demand of a holder. Deposit money on hand may be an asset in the general sense but it is a part of a liability subject to the demand of a holder; the depositor has the (almost) unlimited right to walk into their bank and ask for all their money. Therefore, if the bank were to suffer a large risk event tomorrow, they cannot count on using the deposited money for it because, theoretically, everyone could post a demand (e.g. a run) simultaneous with the risk event. That is also why money deposited at the central bank cannot be used that way either: they don't actually have that cash on hand and they cannot demand it from the central bank immediately in order to cover that risk event. Deposits are even worse however because they also count as an additional liability for a percentage of their total against the capital of the bank, which reduces the bank's capital equivalent asset total even further and thus have a larger effect on the asset allocation percentage.
Here is my attempt at a true ELI5. Let's say you are the playground bank. The only deposit you have is $10 from me and you don't hold any loans. The schoolyard bully says they spun the Wheel of Doom and you owe $1 by the end of the day. You could use a dollar from my $10 to cover that event but I could walk up at any time and ask for it back. Therefore, there is no guaranteed way to simultaneously survive both events with your capital. However if in addition to my $10, you had either $1 worth of CCE in an account of your own or stock that sells for $1 (equity) you are guaranteed to survive the event without problem.
Real life is more complicated because they deal with probabilities, but that is the basic idea. They are trying to make it so the bank survives the risks it takes on while simultaneously limiting the damage it does to other institutions, protecting the depositors money, and preventing passing of risk onto borrowers through calls.