Charting Banking XVI: Loans to Deposits

Includes: KBE, KRE, XLF
by: PlanMaestro

Traditional banking is easy, you pool deposits and loan them. Hopefully to a productive use so you get paid back. In 2008, most American banks were not overextended with their funding not depending on the frailties of wholesale funding. Check banks in countries suffering a balance of payments crisis and you will see loan to deposit ratios of 120% and above.

Source: Federal Reserve Board

Until September 2008 the crisis was confined to housing malinvestments. The most severe abuses were perpetrated by shadow banks inside the now infamously famous CDOs. Investors were going to take losses but isolated from the commercial banks and, in consequence, from the rest of the economy.

The problem was that the shadow banking system indeed depended on the frailties of wholesale funding and their issues reverberated to the rest of the financial system. The moment commercial banks were thought compromised, and some of them were, the crisis reached another tone.

From September 2008, a staggering $700 billion in loans dried up over the next year despite the government efforts to stabilize them with TARP. An remember that this is traditional banking, it does not included the shadow banking trillions (CDOs, CLOs, CMBS, ABS) which were decimated. The run also affected productive loans, unrelated to the housing issues, and fed back to the banks by affecting the pricing of real assets that secured a large percentage of their loans.

The good news is that banks started loaning again at then end of 2009. This supports the initial impression from the Fed survey of lending practices. However, we are is still significantly under-loaned and suffering fits and starts.