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Do Banks Have Too Much Cash?

New regulations aimed at reducing tax evasion may be driving more cash into U.S. banks.  That would seem like a big boon for banks here, but in fact, some analysts say, even financial institutions find that more money does in fact bring more problems.

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The new rules will require banks to report more details about income earned by account holders who live in other countries.  The enforcement is causing some foreign banks to turn away U.S. customers, and as a result, analysts say more cash is being deposited in American banks. Incredibly, says Dan Geller, executive vice president at Market Rates Insight, a financial analysis company, these deposits could lead to higher fees for Americans as U.S. banks struggle to handle the increase.

Total deposits in U.S. banks increased 7.6% so far in 2011, nearly four times the increase seen in the last two years, says Geller. And much of that money is going to “too big to fail” banks –those with at least $50 billion in assets– which saw deposits increase by 13% this year through September, according to Moebs Services, an economic research firm. But with the housing market still slow, and overall lending down, banks are struggling to make money off of the extra cash, adds Geller: “Banks have a lot of deposits they cannot put to use.”

If demand for loans were stronger and interest rates were higher, banks would be able to earn more off the deposits through the interest they charge to consumers, says Geller. Instead, the burden is leading to higher banking fees and lower interest rates on savings accounts, he says.

Another problem: when deposits increase, banks need to hold more capital as a cushion to cover insurance costs and potential losses, says Mike Moebs, CEO of Moebs Services. That means American consumers could see banking fees, such as ATM feels and other fees charged to checking and savings accounts, inch up over the next several years, he says. “For banks to survive, what they’ve got to do is reduce their expenses and increase their fee income,” says Moebs.

Of course, if the demand for mortgages — a huge source of income for U.S. banks– picks up, that could provide some relief for banks, which could trickle down to consumers, he adds.  The National Association of Realtors reported this morning that pending home sales, an indicator of how the housing market might fare in the coming months, increased 7.3% in November to the highest level in 19 months.


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