Low interest rates: No free lunch

Total assets of commercial banks in the US spiked up by $2.5 trillion (T) in the three months ending April 2020. Since then, total assets have contracted slightly (-$117bn) but, while total assets have hardly changed, this hides some far sharper changes in the composition.

Commercial Bank Assets: Total Assets


Consumer loans fell sharply at the onset of the lockdown, mainly, we suspect, from consumers channeling spare cash into repaying debt.

Commercial Bank Assets: Consumer Lending

Residential real estate loans are also falling.

Commercial Bank Assets: Residential Real Estate


Loans to the business sector spiked sharply in the early months, as business drew on existing credit facilities, but then declined by $270bn by September 2020.

Commercial Bank Assets: Commercial & Industrial Lending

Commercial real estate loans are edging higher, up $58bn since Feb 2020.

Commercial Bank Assets: Commercial Real Estate

Federal Government

Investments in Federal debt (Treasury and Agency Securities) climbed $466bn since Feb 2020, to more than $3.6T.

Commercial Bank Assets: Federal Debt

While cash assets soared by $1183bn, to over $3.0T.

Commercial Bank Assets: Cash

Cash assets held by commercial banks are mainly reserves on deposit at the Fed, as the chart below illustrates, which represents indirect lending to the Federal government (via QE).

Commercial Bank Assets: Reserves on Deposit at Fed

The combined total — Treasury & Agency Securities plus Cash Assets — represents an increase of almost $1.65T since Feb 2020.

Commercial Bank Assets: Breakdown


Consumers have received limited assistance from banks since the start of the recession. Business was able to draw on existing credit facilities at the onset but overall credit to commerce and industry is now contracting. Bank assets are instead flowing into federal debt, either Treasury & Agency Securities or indirectly, through reserves on deposit at the Fed.

There are no free lunches. Low interest rates are squeezing net interest margins, making banks increasingly risk averse.

Major Banks: Net Interest Margins

This is likely to restrict new business investment as well as sales of consumer durables — motor vehicles, housing and furnishings — which would inhibit future growth.