Photograph by Craig Warga — Bloomberg via Getty Images
By Stephen Gandel
November 11, 2014

At U.S. banks, the money is still coming in much faster than it is going out.

In the third quarter, cash balances at U.S. banks rose by $58.7 billion. That’s not a huge number, considering some of the biggest banks have $2 trillion in assets each. But it is a lot when you consider this: Lending in the quarter was only up by $53.7 billion, $5 billion less than the increase in cash, according to Bankregdata.com.

Coming out of the financial crisis, banks were slow to start lending. So a number of economists have noted what good news it is that lending has gone up, especially after the second quarter, when banks upped their loans by $183 billion. And the third quarter will mark the sixth consecutive quarter in which lending increased, by far the longest stretch of continuous loan growth since the end of the financial crisis. But loan growth slowed once again in the third quarter. Also, what has mostly gone unnoticed is that, while lending has restarted, banks have been socking away more and more cash.

Cash on hand at the banks has zoomed recently. In all, U.S. banks have $1.9 trillion dollars in cash on hand. That’s up 25% from a year-and-a-half ago. Lending during the same period is up by just 7%. About 12% of all banks assets are now in cash. Before the financial crisis, most banks held around 3% of their total assets in cash.

Banks are also opting to buy Treasuries instead of lending. U.S. government debt holdings jumped 40% at the nation’s seven largest banks in the third quarter, though it’s still a relatively small $272 billion. In all, banks have added $185 billion in Treasuries over the past year, a 116% increase.

What’s going on here? There are a number of ways to measure the health of the banking sector. Earnings is one. The amount of capital banks have on hand is another. Both of those measurements are up. But another key measure of health, both for banks and the economy, is whether banks are lending. In some areas, lending is growing. In the third quarter, corporate lending was up nearly $10 billion, and auto loans were up by around $9 billion. But both were small increases, just 0.6% and 2.4%, respectively. Overall, lending growth has been slow to materialize since the financial crisis.

That has made some bankers nervous. “The thing today is that there is very little loan growth,” said Emmett Daly, an investment banker at Sandler O’Neill, who works with regional and mid-size banks, speaking on a panel discussion on Tuesday morning hosted by trade publication Mergermarket.

Why is this the case? It could be that the economy is still not very strong. If there’s little demand, banks will lend less. But, anecdotally, it seems that demand for lending is growing. And more and more borrowers appear to be turning to hedge funds and other lenders to make loans to customers who are being turned away by banks. It could also be that lending is growing, but at startups like Lending Club, not at the banks.

At the same time, banks have come up with nifty ways to turn loans into cash quickly. That could be part of the story, but since cash rose faster than lending, it can’t be the whole story.

Bankers say the answer is regulation. New liquidity rules mean that they have to hold onto more cash than they used to. “My clients tell me it’s regulatory-driven,” says Joseph Vitale, a partner at law firm Schulte Roth & Zabel. “They say they would lend more if it weren’t for the regulators.”

Bill Moreland of Bankregdata.com says it’s hard to believe that it’s all because of regulation. If it is, regulators have gone overboard. “It’s $2 trillion dollars,” says Moreland. “What do regulators expect is going to happen?”

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