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Lending measure hits new low at nation's largest bank

January 14, 2014: 3:52 PM ET

JPMorgan Chase's earnings showed that one measure of the U.S.'s financial health still hasn't recovered.


FORTUNE -- The nation's largest banks are healthier than they have been in years. Someone, apparently, forgot to tell their loan officers.

JPMorgan Chase (JPM) reported its 2013 profits on Tuesday. The news was mostly good -- bottom line: $18 billion -- but there was one significant black spot, not just for the bank, but for the economy in general. A key lending metric, the ratio of the bank's loans-to-deposits, hit a new low.

In 2013, JPMorgan on average lent out just 57% of its deposits. That's down from 61% a year ago and the lowest that ratio has been in at least a decade. Back in 2004, JPMorgan's loan-to-deposit percentage was as high as 88%. It's also down at rivals. But not as much. The industry average is just under 70%.

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Traditionally, banks have lent out 80 to 90% of their deposits, leaving some wiggle room to be able to pay back depositors and swallow some lending mistakes, but still funneling most of the money they get out to the economy in the form of loans.

Then came the credit crunch. Lending dropped during the financial crisis and the Great Recession. It has recently begun to rebound slowly. And JPMorgan had $5 billion more lent out the end 2013 compared to the beginning of the year. But consumers and companies have been socking away deposits into the bank at a faster rate -- an additional $94 billion in 2013.

It's unclear why JPMorgan hasn't lent out more of the money that has come rushing into the bank. There are two potential answers, both of which suggest the economy is still rather weak. One is there is little new demand for loans. That suggests individuals and corporations are still worried about the economy and not willing to take a risk by either buying a house or expanding their business.

The other is JPMorgan still isn't interested in making loans because the bank thinks it can do better elsewhere. On a conference call with analysts on Tuesday, CEO Jamie Dimon says the bank has around $350 billion in cash on deposits at central banks around the world, much of it at the Federal Reserve. It also has over $300 billion in low-risk investments, like short-term government bonds. That roughly equals the amount of loans the bank has made.

Many have attributed the lack of lending to new regulations that boost the amount of capital banks have to hold. But the amount JPMorgan has in cash and low-risk investments suggests that it isn't regulators who are holding back lending.

Low-interest rates, which drive down what the bank can charge for loans, could be part of the issue. But that would affect the return on other investments as well. Another possibility is that the bank thinks lending in this economy is still not worth the risk, at least given what the bank is currently getting paid for loans. During Tuesday's conference call, CEO Dimon said that if interest rates rise, the bank would quickly look to reinvest its idle money. But it didn't say that would necessarily mean more lending.

JPMorgan's loan-to-deposit ratio is so low in part because it can borrow more cheaply elsewhere. That indicates that some investors must believe that the bank is too big to fail. Still, this only explains a small part of the jump in the percentage.

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All this is bad news for 2014. The economy has been picking up in the last few months and, despite a recent disappointing jobs report, most economists think that will continue. But deposits are usually a key part of the economic engine of growth. Consumers put the money they can't afford to lose into bank accounts. The banks round up that money and lend it out to companies that want to expand, or to other people who want to buy houses, creating jobs. As long as that mechanism is broken, it's slow growth ahead.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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