Washington Insider-- Monday

Largest Banks Flush With Cash

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Office of Special Counsel Rebukes Perdue For North Carolina Visit

A North Carolina stop by USDA Secretary Sonny Perdue was a violation of the Hatch Act when he urged those at the Mills River, North Carolina, event that they could get four more years of the “decider-in-chief” if they voted for President Donald Trump, according to the U.S. Office of Special Counsel.

They said that there will be no disciplinary action against Perdue if he quickly reimburses the government for the travel costs that were paid by the U.S. Treasury. The law generally bars federal employees from engaging in political activities while on duty, but exempts the president and vice president.

The Citizens for Responsibility and Ethics in Washington brought the complaint against Perdue. Prior violations of the Hatch Act by Trump administration officials have resulted in the Trump campaign providing the government with reimbursement.

USDA Publishes Final Rule On Conservation Stewardship Program (CSP)

USDA has published the final rule for the Conservation Stewardship Program (CSP) which makes changes to the program called for under the 2018 Farm Bill and also reflects the more-than 600 comments that were received on the initial rule for the program.

USDA said that the reduced funding for the program could result in higher environmental benefits since the focus will be on those CSP efforts that provide a higher degree of environmental results.


Washington Insider: Largest Banks Flush With Cash

The nation's largest banks are being more cautious with their lending than they have been in at least the past 35 years, Bloomberg reports.

Cash, treasuries and other securities effectively guaranteed by the federal government now make up more than 35% of the combined balance sheets of the 25 biggest U.S. banks, according to the Federal Reserve. That's the biggest share going back to 1985, and is 5.5 percentage points higher than the five-year average.

Loans and leases now account for less than half of big banks' books for the first time on record, spurred by what appears to be a combination of lower borrower demand and lenders tightening their standards as the coronavirus pandemic drags on. The cautious stance will fuel debate over whether giant firms are prudently guarding against a worst-case scenario or exacerbating the pain by slowing the flow of credit, Bloomberg said.

“The banks have been flooded with deposits and have nowhere to put it,” said Brian Foran, an analyst at Autonomous Research. “Healthy companies don't want to borrow because the future is still uncertain. Struggling companies would like to borrow to stay afloat, but as a bank it's hard lending to those sectors.”

Next week, the largest U.S. banks, including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., will report their third-quarter financial results—and will detail their lending activities over the past three months. Investors will be listening for executives' commentary on how their customers are faring during the COVID-19 crisis.

The KBW Bank Index has slumped 30% this year, fueled by Citigroup's 44% decline and Wells Fargo & Co.'s 53% drop. The S&P 500, meanwhile, has gained 6.7%.

Hopes that U.S. economic growth would quickly rebound following widespread shutdowns in the spring have largely faded, with economists not expecting a turnaround until the second quarter of 2021, Bloomberg said.

The pullback in lending comes despite some $525 billion in forgivable small-business loans under the federal Paycheck Protection Program, launched in response to the pandemic. Had the banks kept the mix of loans to securities and cash they've had in the past five years, the flood of deposits would've meant an extra $635 billion of loans for consumers and businesses, the figures suggest.

Bankers are arguing that businesses have less need for credit, whether in the form of commercial and industrial loans or commercial real estate financing, according to the latest comprehensive survey of banks' senior loan officers. Households have been clamoring for home mortgages, loan officers said but there's less demand for other forms of financing, such as credit cards and auto loans.

When compared with the range of lending standards that have prevailed since 2005, the heyday of lax mortgage requirements, most large banks told the Fed they're stricter now in doling out credit to all types of borrowers, with few exceptions. Almost half of large banks surveyed said that they're about as restrictive as they've ever been in the past 15 years when it comes to providing credit cards to subprime borrowers.

PNC Financial Services Group Chief Executive Officer William Demchak told investors last month that his bank's lending probably would fall by close to 5% in the third quarter from the previous three months, a far steeper drop than the roughly 1% decline he predicted in July.

More than 800,000 Americans have filed for initial unemployment benefits every week since March, nearly quadruple the weekly average in the previous five years, according to the Labor Department.

Almost a quarter of Americans expect someone in their household to experience a pay cut within four weeks, while nearly a third say it's been difficult to pay for usual household expenses, according to the latest Census Bureau survey.

Since the end of February, the largest banks' balance sheets have expanded by $1.3 trillion, thanks to a flood of deposits and an ongoing Fed campaign to buy government-backed bonds, mostly through the largest lenders. The banks in turn have channeled that money into growing their stockpile of cash and government-backed securities by $1.1 trillion.

At Zions Bancorp NA, there's been virtually no increase in lending aside from forgivable loans to small businesses under the Paycheck Protection Program, President Scott J. McLean said at an industry conference last month.

“I'm not going to apologize for our loans being flat to down,” he said. “There's obviously limited economic activity.”

So, we will see. In recent days, anti-corona virus stimulus measures have faced increased pushback as legislators attempt to pass new efforts into law. And, in these toxic political moments, any suggestion that the very large banking institutions that are being charged with the delivery of crucial economic interventions are falling short in their responsibilities likely will be the focus of bitter criticism. Thus, producers should watch very closely as next week's report emerges, Washington Insider believes.

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