All Loaned Out? Banks loan out larger portion than ever, but impact is unclear

While those loans do bring a greater return on investment than other options such as U.S. Treasury bills, opinions are somewhat mixed as to what exactly that means to the industry. Some think it’s a result of banks being more willing to make loans, while others point to customers who are saving less and have better credit.

Nationally, ratios peaked at 112 percent June 30, up 4 percent from 2001, according to the Federal Deposit Insurance Corp. A ratio of more than 100 percent means that a bank has made more loans than it has deposits.

Missouri numbers are more modest, but they’re still climbing; Show-Me-State-based banks had a 90 percent ratio as of June 30, 2006, up from 82 percent in 2001, according to the FDIC.

Thomas Wyrick, Missouri State University economics professor, said the trend is a result of a consistently strong economy for the last 25 years.

“When the economy is stable, everybody has this calm feeling and doesn’t worry as much about what could happen,” Wyrick said, “This feeling of safety and comfort causes bankers who would normally be a little nervous about making loans to say, ‘There could be a little slowdown, but it won’t be a big deal.’”

Bankers’ perspectives

Bob Hammerschmidt, regional president for Commerce Bank, is aware of the changes in the market. Commerce’s loan-to-deposit ratio is about 87 percent according to FDIC figures, and Hammerschmidt said his bank tries to keep that ratio from getting much higher, because a high ratio can lead to a problem with accessing funds.

“When (banks) leverage themselves that much, it can become a liquidity challenge,” he said. “If some deposits leave, others have to fill in, or they have to find other sources of liabilities to borrow such as going to the federal home loan bank.”

Not all banks, however, think higher ratios are troubling.

Shaun Burke, CEO and president of Guaranty Bank, which has a 120 percent ratio, said his bank’s willingness to lend is due to the strength of the economy.

“Willingness to go loan money isn’t driven by your deposits,” Burke said. “The willingness to loan money is driven more by the economic conditions than the ability to fund it with deposits. That loan-to-deposit ratio is almost a secondary ratio.”

He also pointed to continually shrinking personal savings rates – the U.S. Bureau of Economic Analysis says the national savings rate is less than 1 percent, down from more than 3 percent six years ago.

Mark McFatridge, area executive of Regions Bank’s Central/Southern Missouri Group, said that while a ratio of 80 percent or higher might have been troubling 20 years ago, it’s not such an issue today.

Regions’ nationwide ratio is right at 100 percent.

“Now, there are more ways for banks to make money – they can use more fee increases and surcharges,” McFatridge said, adding that many banks also have their own investment companies, which means that if a customer’s money is not deposited, it is often invested in the bank’s own firm.

McFatridge mainly attributes the higher ratios to deposit totals that aren’t growing as fast as loans. While part of that is due to customers choosing the stock market and real estate instead of traditional checking and savings accounts, bank competition also is a factor.

“In some markets – and Springfield is one – deposits aren’t growing as fast as the number of competitors or branches is growing,” he added. “You combine those things, and that lowers the deposit side.”

Burke added that banks now have several more avenues to build their deposit numbers than in the past, including the ability to borrow from the Federal Home Loan Bank System, a system similar to the Federal Reserve.

A bigger problem?

The higher ratios, Wyrick said, could spell big problems down the road.

When banks are willing to make more loans, some also are willing to lower the standards for those receiving the loans – creating increased risk of defaults if the market takes even the slightest downturn.

Add to that the fact that banks have increased ability to sell loans to larger holding companies – which could mean banks are less worried about the long-term viability of loan repayment – and the potential result is a vicious cycle of economic negativity, according to Wyrick.

“Banks make loans to people who shouldn’t be getting loans, and then the economy slows down, and unemployment goes up 1 (percent) or 2 percent,” Wyrick said. “Those people can’t make the payments, and banks have to foreclose. Then the bank has to sell those houses and cars, and that depresses prices of houses and cars.”

Recent numbers seem to lend some credence to the argument – foreclosure rates nationally were up three-quarters of a percent in the second quarter of 2007 over the same period in 2006, and median existing home prices dropped 1.5 percent in the second quarter of 2007 from the same period in 2006.

The problem could worsen, Wyrick added, if potential homebuyers opt for recently foreclosed properties instead of new construction, leading to a weakened building market.

“Once things start slowing down, they create these mutually reinforcing problems,” he said. “It’s not spiraling into the Great Depression, but that little bit of bad news is not the end of it – that little bit of bad news creates more bad news.”

Generally, though, McFatridge said he’s not overly concerned about the higher loans-to-deposits ratio.

“It’s a philosophical change, and it’s something that bears watching,” he said. “But I don’t know that I would classify it as a crisis.”