By Jonnelle Marte
U.S. banks could soon be required to prove they are capable of surviving losses. But instead of being a comfort to consumers, analysts say proposed new rules might put a tighter lid on lending.
The Federal Deposit Insurance Corp. published a proposal that would require FDIC-regulated banks with more than $10 billion in assets to conduct tests on how they might survive certain economic scenarios. As part of the Dodd-Frank financial overhaul, which requires such “stress tests” for the largest banks and financial firms, the proposal aims to reduce the need for bailouts from the federal government, experts say. But the new requirements could have unintended consequences, says Dan Geller, executive vice president at Market Rates Insight, a financial analysis company. ”Banks that do not have enough liquidity, they might have to stop lending,” says Geller. (See FDIC Proposes ‘Stress Tests’ for U.S. Banks).
Banks that don’t meet the requirements would need to attract new deposits or reduce their risk taking, says Geller. But with overall deposits at U.S. banks already on the rise—and some banks taking on more deposits than they can handle– few banks will be looking to add new perks to attract more depositors, says Greg McBride, senior financial analyst at Bankrate.com. Indeed, with loan demand still slack, many banks are struggling to make profits on the deposits they already have, says McBride. While borrowing on credit cards, car loans and other kinds of debt increased in recent months, demand for mortgages remains weak. “If anything, banks needing to boost capital cushions could scale back credit availability even further,” he says.
To be sure, some banks may offer perks like higher interest rates or begin waiving checking fees in order to attract more deposits from consumers, says Geller. Such retail deposits are more stable than wholesale deposits from brokerage firms that remove cash frequently and in large amounts, he says. “Overall deposits are up but it doesn’t mean that every bank has enough deposits,” says Geller.
But any such boon would be minimal, analysts say. As SmartMoney.com previously reported, banks with at least $50 billion in assets, which have to undergo the heaviest level of stress testing, are already attracting the lion’s share of new deposits. Those banks saw deposits increase by 13% in 2011 through September, according to the most recent figures available from Moebs Services, an economic research firm.