NEW YORK — Federal regulators have asked some banks to take more deposits from large investors even if it's unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.
Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe's debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it's hard for financial firms to reinvest the new money profitably.
Regulators have asked banks to take the deposits anyway, three people said, with one lender accepting $100 billion. The regulators want lenders to take the deposits because it improves the stability of the financial system, according to one of the people, who said U.S. banks are viewed as places of strength.
Some of the largest ones have talked with regulators about softening rules for ratios that measure capital and assets, according to the people, who declined to be identified because talks are private. At least one asked for a waiver on paying higher premiums to the Federal Deposit Insurance Corp., which is less likely to be granted, one of the people said.
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"If the helicopter comes raining money on your bank and it's only temporarily there, it could be excessively costly and disruptive," said Robert Litan, a vice president of research and policy at the Kansas City, Mo.-based Kauffman Foundation.
Cash held by domestically chartered U.S. banks, which includes Federal Reserve balances, rose to a record $1.02 trillion earlier this month, up 27 percent from the end of July 2010. Deposits held by the 25 largest lenders expanded to $4.69 trillion in the week ended Aug. 10, up 8.5 percent from the end of May. The Fed's balances advanced to $1.61 trillion as of Aug. 24, from $1.05 trillion a year earlier. The extra deposits are problematic because they're subject to withdrawal, so banks have to park the money in low-yielding short-term investments, Litan said. With few other choices available , banks have stashed their excess deposits at the Fed, which means the cash gets counted as assets.
This expands their balance sheets and thus pushes down their leverage ratio, which measures Tier 1 capital divided by adjusted average total assets; the lower the ratio, the weaker the bank, at least in theory. In reality, regulators regard U.S. lenders as relatively strong with sufficient capital cushions, the people said. Lenders have held discussions with officials at the Fed, FDIC, Office of the Comptroller of the Currency and the Treasury Department, according to four of the people. Spokesmen for the four agencies declined to comment.
Regulators may decide, for example, to ease curbs on deposits swept in from brokerage affiliates as part of any forbearance, said James Chessen, chief economist at the Washington-based American Bankers Association.