Thanks to the coronavirus, banks are attracting a lot of money.
That may not seem like an obvious cause for celebration as businesses and the overall economy continue to suffer the effects of the pandemic shutdown.
But it is good news. Bolstered by a flood of cash deposits, and the fact that banks entered this crisis with greater capital levels, they are in a much stronger position than they were after the 2008 crisis to support the economy through lending.
That in turn should provide more opportunities for both individuals and businesses to invest in smart ways to adapt themselves to the many “new normal” aspects of the COVID-19 economy and beyond.
According to FDIC data, a record $2 trillion surge of cash hit U.S. banks’ deposit accounts in the first half of the year. In April alone, deposits grew by $865 billion, more than the previous record for an entire year.
It may seem counter-intuitive that bank deposits are booming at a time of economic stress, but there are clear forces behind the phenomenon.
The primary one is the massive infusion of government stimulus that hit the economy, including by the Federal Reserve and through the $659 billion Paycheck Protection Program that helped prop up businesses.
The change in spending habits and opportunities brought about by the pandemic is another big factor. As lockdowns gripped more states, people effectively ran out of things to spend their money on, from gas for car trips to discretionary spending on movies and vacations.
The uncertainty about the economy and the volatility of markets also likely led many people to choose the safest possible harbor for their cash. That trend also applied to businesses, many of which postponed expansion decisions and hunkered down.
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So what does all this mean for consumers and businesses?
Backed by the mountain of cash, banks are going to be more willing than ever to make good loans. Note the emphasis on “good.” It’s still up to individuals and business owners to make their cases with good ideas, coherent financial plans and a nice chunk of deposit money.
Banks’ healthy lending ability combined with the higher-than-average balances in people’s bank accounts should make this a great time to borrow and invest smartly for the very different economy we’re heading for post-pandemic.
For individuals who are in industries with poor growth prospects, borrowing money to invest in education and training programs for jobs with better prospects, such as in healthcare and data analysis, is a smart move.
Retooling in digital skills seems likely to be a winning investment as the pandemic accelerates the shift to online retail and remote working. The march of technology was already disrupting jobs before the pandemic as Big Data and AI tools advanced.
In other words, if you can get your hands on some cash, now is a good time to invest in yourself.
Similarly, businesses that have managed to survive the pandemic have the opportunity to explore new areas of growth. Restaurants, for example, shifted to outdoor seating in the summer months. But as colder weather sets in, that avenue for sales could get closed off without some investments to make it work or to generate alternative revenues.
If you have a smart idea, now might be the time to pursue it. Businesses may want to invest in shifting toward new areas of demand or change their business models entirely.
As shopping malls across the country suffer, many retailers will have to accept that some shoppers may not come back. One answer may be to invest in building a better online sales presence, helped by the savings from a reduced physical presence.
Creative thinking is going to be needed to adjust to these challenges. But the money is there to help take advantage of these opportunities.
Perhaps the biggest reason to be optimistic about the money sitting in banks is that we don’t have to be as worried about the stability of the financial system. That’s a big contrast to the 2008 financial crisis when we saw a number of bank failures.
High deposits in addition to higher capital levels mean banks have stronger liquidity and are in a better position to weather the coming challenges.
We can already see a beneficial effect from that, especially in the home mortgage arena. With 30-year fixed rates having fallen to 3% or below, mortgage lending this year is expected to hit a record $3.9 trillion.
We may well look back on the pandemic as one of those historic turning points when the old economic certainties were replaced by new tools and new thinking. The fact that banks are in a strong position to help that transition is a welcome advantage.
Patrick Sobers is head of Business and Consumer Banking at NBH Bank and president of Community Banks of Colorado.