U.S. banks flush with cash as funds flee Europe
Investors have pulled so much money out of Europe that its banks won't even lend to each other. At the same time, U.S. banks are so flush with cash they're having a hard time figuring out what to do with it.
Despite desperate moves by the European Central Bank, the Federal Reserve, and the central banks of Japan, England and Switzerland, Europe's banks have all but stopped lending to each other. This is because of growing doubts about the worth of the sovereign bonds that are the banks' key assets. BlackRock CEO Lawrence Fink said yesterday that banks are realizing their sovereign debt holdings "may not be an asset that they want to have" on the books, and that means an "asymmetric amount of selling versus buying."
Investors are worried about the solvency of pretty much every EU nation that isn't Germany -- regardless of how good its finances actually are. Tuesday saw a mass sell-off of Eurozone bonds as fears spread past Italy -- whose yields were back over the dreaded 7 percent mark -- and Spain to triple-A-rated France, Austria, the Netherlands and Finland.
Really? The Finns? They're so frugal they make the Germans look like a Kardashian on a Rodeo Drive spree.
Things are so bad that last weekend the European Financial Stability Facility spent $135 million buying its own bonds.The result is banks that have cash are now guarding themselves by hoarding it. Unfortunately, this just increases the risk. As Reuters' Felix Salmon wrote,
[Europe's] banks have to be constantly lending to each other: in nearly every country in Europe, the amount of bank debt coming due every day is higher than the total amount of bank capital in the system. The overnight interbank market is the bloodstream of the European financial system, and the flow of blood is coming to a halt.
A lot of the cash that was in Europe seems to now be in U.S. banks, where it is actually causing the kind of problems banks like to have.
According to a report from SNL Financial, the three-year cumulative average growth rate (CAGR) of deposits at U.S. banks of all sizes makes it look like they've been using more steroids than Major League Baseball. As of late October, the CAGR at BNY Mellon was 45 percent; Wells Fargo was 40 percent; and Fifth Third Bancorp was 33 percent. At many smaller institutions, the CAGR is well over 100 percent.
Because there are few ways to get high short-term yields, businesses are keeping a lot of cash in what you or I might think of as standard savings accounts. The banks are now having trouble figuring out how to invest all this money at a time of tighter underwriting standards and very weak loan demand. TD Bank had $142 billion in deposits as of late October, and finance chief Steve Boyle told CFO magazine:
Banks like us that are creditworthy are seeing folks pull money out of the markets and park [it] in deposits. But if we're not sure those deposits are going to stick around, we can't really invest them long term or lend them.
All this leaves U.S. banks in fairly good positions to weather the storm that will be caused by the EU crashing. Unfortunately, that crash will further slow the U.S. economy meaning even fewer things to invest all that money in.
More on MoneyWatch:
