A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week
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October 20, 2014

Should you mind this gap?
US bank deposits and bank loans

chart

Source: Bloomberg, as of 10/1/14. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Bank loans have accelerated in 2014, but the divergence between deposits and loans that began in 2009 has continued to widen.
  • Under normal economic conditions, deposits and loans have tended to track each other closely; the initial disconnect occurred in the wake of the financial crisis.
  • One common view behind the ongoing disconnect is that it reflects a drop in demand for new loans typical of a slow economy, banks' continued hesitancy to lend, and of stricter loan rules
  • If so, lending activity should accelerate rapidly to catch up with deposits as the economic environment continues to improve.
  • But others view the current situation as primarily driven by the surge in deposits caused by the Federal Reserve's (Fed) quantitative easing (QE) policy.
  • After all, when the Fed purchases an asset from private sector investors, new cash is created and credited to the previous owners' bank deposit accounts. But that doesn't automatically translate into increased loans. Instead, deposits grow whether or not loans increase.
  • By that view, any closing of the gap between deposits and loans would more likely be the result of Fed action rather than a change in lending policy or demand for loans.
  • Whatever the complete explanation for the wide gap between deposits and loans, the acceleration in bank loans this year is arguably a positive sign for the US economy.

The chart:

  • The chart shows total deposits and loans of US commercial banks, as well as the year over year change in total loans for the past 10 years.
  • Note that prior to the financial crisis and Great Recession deposits and loans were roughly equal, but diverged in 2009; the gap has continued to widen as deposits have increased more than loans.
  • Loan growth accelerated in 2014, from a year over year change of 2% in January 2014 to 6.4% for the week ended 10/1/2014—the fastest year over year pace since the recovery began.

Definitions:

The Great Recession refers to both the US recession that lasted from December 2007 to June 2009—considered the most severe since the Great Depression in the 1930s – and the ensuing global recession in 2009.

Deleveraging refers to decreasing financial leverage; most often via paying off existing debt.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

Quantitative easing (QE) refers to a monetary policy implemented by a central bank in which it increases the excess reserves of the banking system through the direct purchase of debt securities.

The Federal Reserve's balance sheet refers to the assets and liabilities held by the central bank.


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