Banks are beginning to experience their own version of the rich getting richer as there has been a surge in deposits in recent months.
The US banks all around the country received over two trillion dollars into deposit accounts; this surge began when the coronavirus pandemic hit the country in January.
There has been none other resembling it in the history of the country; the deposit beat the previous year’s record over a long period of time.
By June, Banks all over the country had over fifteen trillion dollars in their records, which was trillions higher than the record they had in February.
The record they had in April was when the inflow of funds hit its peak at over 800 billion dollars. Just the deposit for April fully surpassed the record they had for deposits made in a whole year.
However, the inflow of deposits slowed down a bit in May, and the US banks also saw a deposit of about six hundred billion dollars being added to accounts.
The new increase in deposits in bank accounts was motivated by steps taken to proactively sustain the economy of the country throughout the COVID-19 pandemic.
These steps included an increase in benefits for unemployed folks, loans were given to small businesses for sustenance, and there were also direct checks issued out to all households in America.
The sudden uproar in deposits made to accounts first sped up in March when the lockdown was first enforced in the United States to help contain the spread of coronavirus.
Top companies like Ford also took out billions from their different lines of credits during the same March in order to successfully make it through the month; this money was then kept in mega banks and used as loans by the banks.
Much later, banks began to see an inflow of money due to other programs created by the government.
Some of the funds from the program designed to protect citizens’ paycheck initially arrived in the bank of companies that lent through the current banks; this enhanced the number of deposits in total.
Retail consumers also added to the increase of deposits because when the order to remain home was enforced, consumers’ spending habits dropped significantly.
Simultaneously, the number of savings grew exponentially because of the increase in benefits for unemployed folks.
The stimuli funds that were also sent as a relief for the COVID—19 pandemic also played a role in the deposit boost.
Another reason why cash was suddenly in high quantity is that many investors were suddenly scared for the future of investment products.
This led to businesses taking out their funds from investments they found risky and instead, pushed all the funds into their deposit accounts. This action has done nothing to help the economy, which is on a downturn.
Another cause for the increase in deposits was the other steps the national bodies took in order to sustain the economy; there was a program that allowed bonds to be bought boundlessly.
Due to the instability of the future, many households and companies made the decision to start stashing money away.
This made the biggest banks to begin growing even more prominent than other aspects of the industry in the initial quarter of the year.
This record high growth has been termed extraordinary by analysts; banks are now swimming in cash due to the surge of money being forwarded to deposits.
Before the recession, banks were actively sourcing for deposits by offering iPods to potential clients and also higher interests.
Instead, tables have turned, and the flood of deposits has become a problem for US banks all over the country.
However, with the new influx of deposits, interest percentages have fallen significantly to dissuade the flood of deposits.
Some backs are paying as little as they can or nothing at all on current accounts and also CDs. Others are choosing to share the cost of insurance with small businesses banking with them.
Even though banks wouldn’t turn away their clients from stashing money with them, there are fewer incentives being offered to encourage the influx of cash.
This is because, with the many government programs and loans, lending has significantly reduced, and therefore, the banks have no way of making enough profits from the deposits.
In a different situation and economy, this deposit flood would usually be put into good use. Upcoming businesses would be financed by the money, which would be lent out at a very high interest, and homes would be bought with the deposit.
Another way banks would have made substantial profits from these funds is by investing them. However, times have changed.
The financial market is on a downturn, and the economy is as fragile as ever. The piled deposit is doing nothing to help the economy grow.
Only a small percentage of the money has been used to fund new credits.
Although there has been a steady rise in loan collecting in recent months, the high record of deposits is still staunching efforts put in motion to help recover the economy and help it make a comeback.
However, banks are choosing to see the bright side of the situation stating that it is much better not to make more money than to start losing some.
Moreover, there is hope that once the economy makes a comeback, the flood of deposits will begin to yield profits, and it will subsequently builds up the relationship between the clients and the bank.
What’s the Takeaway?
The best option for most banks at the moment is to find securities with really low risks and then invest these piled-up deposits in them.
An option for them would be mortgage bonds, even though these mortgage bonds are offering fewer interest percentages than they initially did.
In conclusion, to avoid losing money with the deposit floods, banks have taken an active step by reducing the percentage of interest.
This will ensure banks don’t lose out on money because they’re taking in more profits than ever.