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Why Banks Must Market Consumer Loans Now

Article by Mark Rodrigues of the Biltmore Group. Original posting January 8, 2009 on Bank Marketing News. Used with permission.

The Federal Reserve is forcing down rates on Treasury bonds and other securities. This means that as banks rush to attract deposits, the money they take in must either be invested in bonds that yield less than their cost of funds, or lend the money to consumers.

Banks that remain reluctant to lend, by maintaining extra conservative lending standards, won't be able to make money on the cash they are taking in.

The Federal Reserve is doing more than just forcing down the price of Treasury bonds to encourage lending. The Fed is also dramatically increasing the money supply. For the last 3 months, the lead measure of money supply, M1, increased by an astonishing annual rate of 37.6%. The largest components of M1 are cash deposits at banks, and that component is growing daily. The Fed is making sure that banks have all they money they need to make lower interest loans readily available to consumers.

But, on average, most banks have kept rates high and purse strings shut. The typical bank has entered 2009 by continuing asset liability policies intent on avoiding risk. Available cash is being invested in low risk bonds that yield not much more than a zero-interest saving account. So, monetary easing didn't really do anything for the economy because cash was recycled into cash look alike instruments rather than into loans. The banking sector's huge demand for cash equivalent investments is in turn forcing short-term Treasury and government securities to drop to almost 0%. Believe it or not, those rates can go below zero, and for brief periods they have.

So, from the Federal Reserve's perspective, it has not been enough to make cheap money readily available. The Fed has been forced to purchase non-Treasury cash equivalent investments in order to drive down yields further. Banks may have a safe investment alternative to lending, but they are quickly turning into negative yield assets.

Not investing deposits is costly too. Thanks to operational and regulatory costs, for every $100 taken in saving deposits, it costs the bank $2 or $3 just to hold on to the cash. If the bank takes that deposit in as a CD or IRA, and doesn't lend it back out, it costs the bank more like $6 to $8 to hold those funds. And you can't make money or stay in business long if you do that.

So the only real alternative for banks is to get back into the lending business. And start making a profit once again.