Peter Crabb: Banks and consumers continue to hold their cash

It’s been a rainy spring, but we have yet to see any May flowers in banking. It appears that for banks, businesses and consumers, cash still reigns.

Sandpoint-based Intermountain Community Bancorp reported big improvements in operating profits, erasing a net loss of $4.3 million from the first quarter of last year. Management attributed the improvements to better loan margins and fewer credit losses.

Nampa-based Home Federal Bancorp is still losing money but operations are improving. Home Federal reported a net loss of $1.2 million for the quarter ending March 31, 2011 compared to a net loss of $1.6 million for the same period last year. Net interest income increased $2.2 million, or 35.5 percent over last year.

Overall, Idaho banks are still losing money but less than last year. According to FDIC data, the Idaho banking industry lost $60.2 million in 2010 compared with $69.5 million in 2009. Net interest income hasn’t changed much, but Idaho banks are writing off fewer bad loans.

Nationally, the banking industry is back to making good money. Banks earned $79.2 billion in 2010 compared with a loss of $12.3 billion in 2009. U.S. banks reduced their provision for bad loans by $85 billion.

If the banking system were operating normally, the current low-interest rate policy of the Federal Reserve would encourage much more lending. Unfortunately, a credit crunch continues as bankers and investors alike leave their money in cash (currency, coin, etc.), deposits or short-term Treasury bills.

Despite better profitability, banks still hoard cash — holding more in reserves than required by regulators and not lending much. Until the banks, businesses and consumers get back to “normal,” the economic recovery will remain weak.

Excess reserves at U.S. banks are at an all-time high of $1.45 trillion, increasing $400 billion over the past year. Banks have more than 19 times the legally required deposits with the Fed.

The Federal Reserve has tried to sidestep this problem by going past the banks themselves. The Fed has bought government debt and mortgage bonds directly from the public for two years now but plans to end these programs this month.

Bankers aren’t alone in favoring cash. Despite an improving stock market and major gains in the commodity markets, U.S. households still hold a lot of cash.

Even though they pay next to nothing in interest savings, deposits at U.S. banks, at $5.5 trillion, are up 10 percent over the past year. Deposits in checking accounts are up 16 percent.

Banks could increase lending but both consumers and businesses have cash, they don’t need credit. Total U.S. consumer credit outstanding declined 5.5 percent over the past year while commercial and industrial loans fell 17 percent.

The financial crisis is over. Banks are well capitalized and are making money the traditional way, lending it out. They can do no more to help the economy.

Policymakers need to turn their attention to consumers and businesses that lack confidence to invest and continue to see cash as king.