Excess Reserve Surge

Douglas Downing

Robert Nielsen

Seattle Pacific University

• 1) slowdown causes less loan demand?• 2) bank lending cutback causes

slowdown?

Lending cutback because of

2a) increased caution / fear of default

2b) Fed paying interest on reserves

Loan to asset ratio (sample)

• BankAmerica annual report• ² We’ve also pledged to increase our own

spending with small- and medium-• sized companies by $10 billion over the

next five years, because many• small businesses told us their biggest

challenge is not access to credit,• but lack of demand*** for their products

and services.

• Our primary liquidity objective is to ensure adequate

• funding for our businesses throughout market cycles, including periods

• of financial stress. To achieve that objective, we analyze and monitor our liquidity risk, maintain ***excess liquidity and access diverse

• funding sources including our stable deposit base.

US Bank annual report

• However, although we are growing• commercial loan commitments, business

customers remain cautious,• and many are not fully utilizing their lines

of credit

US Bank

• In 2009, the Company grew its loan portfolio and increased deposits

• significantly, both organically and through acquisition,

US Bank

• Excluding acquisitions, average loans• and deposits increased $7.7 billion (4.7

percent) and $19.0 billion (14.2• percent), respectively, over 2008.

U.S. Bank

• Despite this activity, the Company has experienced a decrease in

• average commercial loan balances as customers continued to pay down

• their credit lines and strengthen their own balance sheets.

• Sentiment analysis• Challenges: spin and boilerplate language

Summary

• weak loan demand• . strong loan demand • . stricter standards • . . excess liquidity • . . . Total Reports • Year: 2007 9 2 20 7 29• Year: 2009 22 5 23 13 35• Year: 2011 22 3 29 21 43

Weak loan demand phrases• weak loan demand • slowdown in loan demand • absence of robust loan demand • soft\&loan demand • softened\&loan demand • weaker\&loan demand • moderate loan demand • reduced loan demand • sluggish\&loan demand • low loan demand • lower loan demand • challenging market environment

Weak loan demand phrases• weakness\&economy • weak economic conditions • loan demand down • loan demand was down • declining loan demand • meager loan demand • tepid\&loan demand • softness\&loan demand • limited\&loan demand • tempering loan demand • customer demand\&decreased • loan demand\&subdued • lower customer demand

Weak loan demand phrases

• reduced appetite for credit products • weak market conditions • lower industry sales • suppress loan demand • credit line utilization\&low

Tighter loan standards: phrases

• not aggressively pursue\&loans • exit from lending activities • suspended\&lending • discontinue • stricter approval requirements • tighten\&underwriting • tightened\&underwriting • tightening\&underwriting • more stringent underwriting standards • stricter underwriting

Tighter loan standards: phrases

• underwriting standards\&were tightened • underwriting standards became more

disciplined • conservative underwriting standards • raised underwriting standards • underwriting standards\&reduce credit risk • enhanced underwriting standards • underwriting standards are higher • de-risking efforts • more stringent credit