We probably all know by now that banks are ‘hoarding’ cash and not lending ‘enough’, which may or may not be a good thing.After all, some conservatism is warranted, and the higher their cash buffers, the easier and sooner one can make an argument for government support to be removed.
Yet this graphic from the Economist Intelligence Unit to the right shows just how much cash banks have been holding in relation to their loans. The spike shown is obviously a function of both cash being kept and a reduction of loans outstanding. Note how it has jumped to a higher level than even during the 1970’s.
Economist Intelligence Unit: A steady decline in the ratio of cash to business loans—from around 60% in the 1970s to a low of 20% in late 2008—has reversed sharply over the past year. According to Federal Reserve data, banks hoarded an all-time high of 98 cents in cash for every dollar of existing corporate loans during the week of January 13th. The latest reading, for the week of February 3rd, stands at 95 cents.
Thus it’s clear that bank’s could slash this cash-to-business-loans ratio by half and still be well above any level they maintained during the 1980’s, 1990’s, or 2000’s.
Now before you jump on the tired bandwagon of decrying banks for not lending, as an investor you should be loving this chart. Trust us, it would be far worse news if the spike above was inverted. Now that would be a disaster.
What the spike shows is that there is massive future capacity for banks to start lending. Given that stock markets are forward-looking, this means that there is substantial fuel for U.S. businesses available for some day in the future when banks finally start to feel confident again about their balance sheets, and once U.S. businesses bring compelling reasons for loans to banks.
If lending is done intelligently, and patiently, then it will be great news for the economy once the spike above normalizes.