Banking Sector Sitting On Huge Cash Cows Afraid To Lend It Out

By Ashley Jones on February 20, 2010, 6:51 am Posted in Finance News

According to Federal Reserve data, big banks are sitting on $1.29 trillion of cash and they’re not lending, despite lawmakers’ urgings. Excess cash hedges banks’ risk in the event of another economic downturn, indicating concern about the likelihood of a real recovery.

Big Banks Keep Cash

The three biggest banks – Citigroup, Bank of America, and JP Morgan Chase – are sitting on more cash than ever. The $1.29 trillion pool of cash amounts to 98 cents for every dollar of business loans, a record. That ratio has more than quadrupled since June 2008. Banks also tightened standards during that time, with corporate loans shrinking 14% to $1.32 trillion.

Banks say they are keeping more cash to comply with liquidity requirements, which indicates that banks are shifting toward a strategy of safety. But that cash also impacts their businesses. Because they’re not loaning it out, they’re not earning any interest on it. That could impact banks’ profitability, to the tune of several billion dollars a year, industry-wide. Yet it’s also a hedge against risk. If the economy takes another dip, their reserves of cash would give them a cushion to weather tough times.

Politicians And Critics Take Aim

All this occurs as President Obama urges banks to lend out their cash in order to kick-start the economy. He has made $30 billion available to small businesses through community banks. Yet congressional lawmakers have been denouncing banks for their lax lending standards, which they say led to the current economic crisis. Analysts say lending is likely to remain low during this period of low economic activity and high regulatory uncertainty.

 

Critics also take shots at the banks for accepting federal bailout money, but refusing to lend the money to restart the economy. Some have accused them of hoarding the cash or even using it to buy distressed assets to sell back to the federal government at inflated prices. They also say that banks battening down the hatches make the chances of another economic downturn more likely.  It may even be reflected in the wider economy. Surveys show that on average, companies are holding more cash, especially AAA-rated companies. Data from Standard & Poors shows that its companies have significantly increased cash holdings. That indicates widespread concern about the economy. For now, companies and the big banks are sticking with the safe bet: cash.

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