Banks Report Slow Growth In Deposits

WASHINGTON -- In another indication that the economy will rebound sluggishly at best, nearly half the bankers polled by the Federal Reserve Board said growth in retail deposits has been unusually weak since May.

Most of the bankers also said they are doing little to attract new funds; some are even discouraging inflows.

Bank lending shows signs of rising modestly, if at all, for the rest of the year, according to the Fed report released Thursday. It was based on questions posed to senior financial officers of 59 large banks, who were asked to compare business conditions between mid-May and mid-August.

Meanwhile, the bankers saw some recent strengthening in loan demand, particularly at the lower end of the corporate market and among consumers. And fewer banks tightened their loan terms, which suggests that for the second consecutive quarter, the credit crunch is not getting any worse.

The central bank obtained the findings from a special survey of senior financial officers at 59 large banks. The poll, which complements a quarterly survey of senior lending officers, was taken because bank credit conditions and monetary aggregates have been unusually weak in recent months.

Taken together, the surveys underscore a continued mood of caution in the banking industry, as institutions adapt to a period of unusually high loan losses.

"I think this caution is going to last quite a while -- we're talking years, not months," said Sung Won Sohn, chief economist of Norwest Corp., Minneapolis. "Growth in loans is not going to be the major source of income for banks in the future."

Deposits are growing slowly because consumers are attracted to the higher yields on bond funds and Treasury securities, 55% of the financial officers in the Fed survey said.

Nearly half said they were spending less on advertising to draw deposits. They also said they were lowering the rates paid to savers while at the same time raising their transaction fees.

One in five said higher deposit insurance premiums had made deposit growth less desirable.

Three-quarters of the financial officers blamed a slowdown in asset growth on weak loan demand. Other causes cited were securitization and deliberate steps to restrain lending.

One-third of them told the Fed that weak asset growth had quelled their appetite for retail deposits. And half said they had little desire for wholesale liabilities like brokered deposits.

Over the Last Few Months

Asked to compare loan demand in June and July with the previous three months, none said it was "substantially stronger" in any of the business categories: large corporate, middle market, and small business.

Three of 56 respondents, or 5%, said it was substantially stronger in residential mortgages, but two said it was substantially weaker.

One banker, or 2%, saw substantially greater demand for home equity lines of credit, and none said the same about consumer installment loans.

Bankers reporting some degree of stronger loan demand outnumbered those reporting weaker demand in the small business, mortgage, and consumer categories (see chart on page 1).

In mortgages, 39% saw higher demand, 29% weaker, and 32% "about the same." In large-corporate loans, only 5% said stronger, 24% weaker, and 71% about the same.

Loan Officers Polled

In the other Fed survey, of loan officers, 10 out of 56 reported tightening credit standards for middle-market firms, the mainstay of their commercial lending business. Lending to these companies - with annual sales of $50 million to $250 million - was tightened more than credit to large or small firms.

One reason: ripple effects from the commercial real estate downturn, said William B. Conerly, vice president and chief economist at First Interstate Bank of Oregon, Portland.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.