The Big Banks “Swimming in Money”
After a slow start to the post-corona rally, “growth has been nothing short of extraordinary,” says Autonomous Research analyst Brian Foran. In his own words, the big banks are like “Scrooge McDuck swimming in money!”
The biggest driver of their success has been millions of worried people withdrawing from investments and moving cash into sheltered savings accounts. It’s assumed that most citizens saved their lockdown benefits and stimulus checks, which the banks helped to service. There were even businesses parking their bailout funds in bank accounts, like Ford and Boeing, creating a true deposits bonanza like we’ve never seen before!
It’s agreed, then; the banks are bloated, but the deposit book isn’t what investors take home. We need to understand deposits as being core to how banks make us money as effective loan shops – that’s what counts.
The bank pays a rate of interest to savers on their deposits and keeps a reserve of those deposits within easy reach for withdrawals. It takes the rest and loans it out, essentially re-depositing the deposits with more people. The aim is for those people to pay more in interest rates to the bank than the bank pays to its resident savers.
We’ve got a long period of zero and negative interest rates ahead, worldwide, so banks are comparing pittances for pittances. To make things interesting, they need to lend to higher risk-higher reward borrowers. This is called a reach-for-yield or dash-for-trash.
It’s a good predictor of a financial crisis. The banks took in more deposits in the month of April than in any full year on record. There’s an underwhelming runway of low rates on the horizon, so could our bankers be getting ideas?