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 asked not to be identified because talks are private. At least one bank 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.
“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, which promotes entrepreneurial business practices.
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 last year. 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. Under normal circumstances, those deposits could be restricted as part of an enforcement action by regulators, he said.
If the FDIC agreed to forgive some fees, it would have to give up some of the extra premiums that it’s counting upon to rebuild the Deposit Insurance Fund, which covers customers for $250,000 per account in the event of a failure. That makes the agency unlikely to grant a waiver, one of the people said, adding that the existence of the insurance is one of the reasons banks are able to attract the deposits.
The FDIC’s fund, which fell into a deficit of almost $21 billion after a wave of bank failures, turned positive during the second quarter for the first time in two years, the agency reported this week. On April 1, the FDIC changed its formula for assessing premiums, increasing the cost for most large banks and adding to their deposit expenses.