Deposit Growth ≠ Loan Growth

By Walter Kurtz, Sober Look

We’ve received a number of questions regarding the recent post on the trajectory of the US loan-to-deposit ratio (see post). Many are wondering how such fluctuations are even possible. That’s because the classic view in economics is that deposits are created only through loans. When a bank provides a loan, deposits are created as a result. So how is it that US deposits are growing while loan growth has stalled?

The first part of the answer is that loans and leases represent just over half of banks’ total assets in the US. That’s very different from many smaller countries where lending may be a much bigger percentage of banks’ holdings. A US bank for example could provide financing in the form of a registered bond (financing for a municipality or a corporation), which would not show up in the loan-to-deposit ratio.

Assets - all commercial banks


But the biggest problem with the “loans=deposits” school of thought is the assumption that banks operate in a static monetary base environment. This assumes that banks in effect are the only lenders. But these days the Fed is the largest single lender in the US and that’s where a large portion of the deposit growth is coming from. The Fed is lending to the federal government and to the GSEs, which generates deposits at commercial banks. Every dollar the Fed uses to buy securities outright ends up as a deposit at some bank(s). As the chart below shows, this is one of the situations that increases deposits without any corresponding loan growth at commercial banks.

Fed vs Commercial Banks


Through this process QE floods the banking system with deposits in hopes that all this liquidity (excess reserves) will spur banks to increase lending.  However, for a number of reasons – some having to do with low demand for credit – that approach has not worked out as “planned”.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Sober Look

Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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  • Dirk


    I think that you are confusing deposits and reserves. QE, as you rightly state, leads to excess reserves – not excess deposits. The idea that loans and deposits are not equal is correct. Even if banks would not have lent anything at all, deficit spending by the government would have led to a positive amount of both reserves and deposits.


  • Suvy

    Not true. Excess deposits have hit a new high of around $2.1-2.2 trillion. QE creates both excess deposits and excess reserves.

  • Geoff

    I would distinguish between the Fed buying bonds from banks vs from non-banks. I believe only the latter creates new deposits.

  • Geoff

    “The Fed is lending to the federal govt”

    I wouldn’t quite word it like that. The Fed is buying securities in the secondary market.

  • Geoff

    As Tom Brown has demonstrated, banks can create deposits by other means than just making loans. Banks can create deposits by buying literally anything, and marking up the account of the seller.

  • Suvy

    I think that’s accurate Geoff.

  • Cullen Roche

    I agree. It’s better to separate the two. If the Fed performed QE during a budget surplus this would be obvious to more people, but because we’re operating a deficit they often consolidate the two.

  • Cullen Roche

    Right. QE via non-banks creates deposits. I provide the accounting here:

  • Richard from Canada

    Actually I am not sure QE is intended to encourage lending. It is buying up long term assets and exchanging them for short term assets. The banking system is preparing for the babyboomers who will be balance sheet liquidating as opposed to the current balance sheet fixing (saving more) !?That is the big macro event coming…when people all start cashing in assets at the same time and there is no market. The FED is assuring there will be a market in the future by buying now. It will never reduce it’s balance sheet until maybe 2030 after all that inheritance tax starts flowing in !

  • Cowpoke

    Dick, that’s an interesting take on it. Thanks

  • 1jump

    Plus any expenditures or purchases, wages etc.. can just be accounted for by creating deposits?

  • Ante

    Is the Fed buying treasuries and MBS from the banks only as part of the QE3?

    In QE1 it was from non-banks as well, as it was buying directly from GSEs.

  • Odie

    Very theoretically yes. But more practically Banks are in business to make a profit for its owner(s) and not to amass material wealth. If banks would just buy up houses for example they would have assets on their balance sheet that incur costs but not necessarily income. Plus, their prices will be more volatile than loan securities which will require much higher capital and loan-loss reserves. Liquidity is another problem: The Fed accepts loan securities as collateral but not real assets.

    I am sure if banks would operate as some people assume they could by just generating deposits and buying up real assets at will they would not survive an audit. There is a reason that the “other assets” on a bank balance sheet are usually the smallest position.

  • Geoff

    Odie, agreed it is more theoretical, but I think your focus on real assets may be a little narrow. Banks may not be in the business of amassing “material” wealth but they certainly want to increase their general financial wealth (i.e. assets less liabilities). Buying real assets like houses may not be the way to go, but banks can also buy financial assets simply by marking up the seller’s account. Granted, banks can’t buy up the world. They have constraints like capital.

  • Entenschnabel

    Why would the Fed buy now? According to your argument it is now competing with other buyers. Wouldn’t it make sense (under your assumptions) to hold off buying until all the supply is coming onto the market?
    Did I misunderstand your comment?

  • Odie

    And constraints what they can actually buy. Stocks for example are generally prohibited with some exceptions:
    Plus, if their constraint is their capital (as also stated in the link) then banks can only buy non-loan assets with money they earned previously not money they just generated by crediting the seller’s account.

  • Johnny Evers

    How does de-leveraging affect this ratio?
    Let’s say I borrow 10k, then buy a car, then declare bankruptcy.
    The deposit still exists but the loan disappears.

  • Detroit Dan

    This is helpful to me, Odie. Thanks!

  • Detroit Dan

    The lending bank’s capital would be impaired, I guess…

  • John Daschbach

    This gets back to wether you view the system correctly as a system of flows, or break it down into sub-components without understanding that it is the integral over all the flows that describes the system. It is possible to get exactly the same net flow with our without the government running a deficit. Again, you have to understand the basics of MR, and standard mathematical reasoning. At any point in time we can measure the integral of all flows from t = -\infty to t = now. Since it is possible to construct two different sets of flows (actually, an infinite amount, but we need only two to create the proof) that integrate to the same values, with the government running both a deficit and a surplus, it is trivial to prove that the separation is logically meaningless.

    The Fed is just a bank. QE creates money exactly through the same mechanism that private banks create money. The differences between private banks and the Fed come down to what really are secondary issues (the Fed has no artificial reserve requirement, the Fed is limited in what assets it can purchase, …).