What did banks do with the flood of deposits?

Commercial banks in the Ninth District have experienced unprecedented deposit growth and reduced demand for loans since the onset of the COVID-19 pandemic.¹ These two forces caused considerable changes in the composition of assets on bank balance sheets, driven by cautious spending by depositors as well as pandemic-related relief efforts. Banks continue to face the challenge of managing excess deposits while their customers are seeking fewer loans. This article examines contributions from the Paycheck Protection Program (PPP) to deposit and loan growth, and the changes in the composition of bank balance sheets as a result.²

Deposit growth soared; loan growth floundered

*Figure 1 - Deposit and loan growth is the median year-over-year percentage change. All series are calculated for commercial banks physically located in the Ninth District.

The growth in deposits at Ninth District commercial banks has significantly outpaced growth in loans since the beginning of 2020 (1Q20) (Figure 1). Pandemic relief efforts starting in the second quarter of 2020 contributed to the excess deposits, while pandemic-mitigating efforts and cautious consumer behavior curbed economic activity and lowered loan demand. Excluding PPP loans, median year-over-year loan volume throughout the pandemic was largely unchanged. The PPP loan program allowed commercial banks to originate forgivable loans for businesses during the pandemic. Banks deposited the PPP disbursements directly into customer accounts. As shown in Figure 1, this contributed to the large increases in excess deposits in the second quarter of 2020 and again in the first quarter of 2021, when Congress made additional PPP loan funds available.

Regardless of growth in PPP loans, deposit growth since the fourth quarter of 2019 is significant across most banks. As explained in the next section, the median deposit growth rate continues to rise across different PPP proportions even as PPP loan volume has declined significantly. Besides PPP loans, other pandemic-related relief efforts and more cautious spending habits contributed to deposit growth.

Paycheck Protection Program loans contribute to deposit growth

*Figure 2 – Each data series is calculated as the median percentage change in deposits since 4Q19 for all commercial banks physically located in the Ninth District.

PPP loans deposited into customer accounts have led to higher growth rates in deposits at commercial banks in the Ninth District (Figure 2).³ The rate of deposit growth is more pronounced at banks with a higher percentage of PPP loans to total loans. Banks with a ratio of PPP loans to total loans that is greater than 10 percent report a median growth rate of 37 percent in total deposits since the fourth quarter of 2019, compared with 23 percent growth at banks with a ratio of PPP loans to total loans of 5 percent or less. The rate of deposit growth has moderated in the second quarter of 2021 for all PPP loan proportions because the program ended in the second quarter and the volume of PPP loans declined from approximately $30 billion to $19 billion quarter over quarter in the Ninth District (approximately $400 billion to $300 billion nationwide).⁴

Increased deposits cause changes to balance sheet composition

The combination of relief efforts, shifts in spending by consumers and businesses, and the search for profitability in a low-interest-rate environment has led to significant changes in bank balance sheets in the district (Figure 3). Figure 3 shows the median percentage change in assets and liabilities held by banks since the onset of the pandemic (4Q19). As expected, given deposit growth from bank customers, the amount of cash held by banks has grown significantly; recently, however, the trend has shifted to an increase in purchases of investment securities and a decrease in other borrowings (federal funds purchased and Federal Home Loan Bank borrowings, for example). Banks have fewer options for deploying cash, given the limited demand for loans by their customers, so they have opted to increase securities and rely less on borrowings.

To fund loans during the pandemic, Ninth District commercial banks used more liquid sources—such as excess cash—while reducing borrowings. Shifting cash into securities improved revenue, and lowered borrowings reduced expenses. While the shift in assets and liabilities has improved liquidity risk at these banks, the more liquid assets are less profitable than loans.

Summary

Commercial banks in the Ninth District have experienced unprecedented deposit growth and lower demand for loans since the onset of the pandemic. Banks have adjusted by increasing securities purchases and reducing borrowings to manage their balance sheets and maintain profitability. As economic activity increases and the pandemic begins to subside, regulators will continue to monitor shifts in balance sheets, product offerings, and activities, and any resulting increase in risk profile as banks seek earnings opportunities.

Endnotes

1 Commercial banks in the Ninth District include nonmember state-chartered banks, member state-chartered banks, and national banks headquartered in the Ninth District.

2 The Paycheck Protection Program was established by the CARES Act. The Small Business Administration began administering the PPP in April 2020. The PPP established SBA-backed, fully forgivable loans if eligible borrowers met the terms of PPP loan forgiveness.

3 Commercial banks did not submit PPP loan data until the second quarter of 2020.

4 Data are from the Call Report dated June 30, 2021, for all commercial banks in the United States.