Banks Buying More Securities Rather Than Loaning Money Out

Bankers are investing more of their money in government securities rather than lending it to support the economic recovery, the Federal Reserve said Tuesday.

“More than two-thirds . . . reported that their institution had increased its holdings of (U.S. government) securities over the past 2 1/2 years,” the central bank said in summarizing a survey earlier this month of senior loan officers at 59 banks. Those banks hold nearly a third of commercial banking’s $3.1 trillion in assets.

Administration officials, particularly in the Treasury Department, have called repeatedly for banks to make more loans to businesses and consumers to ease the “credit crunch” hampering the economy.

However, the bankers told the Federal Reserve that the difference between the interest rates they now pay on deposits and the rate they earn on the securities is too attractive to pass up.

“Virtually all of them reported that the relatively weak demand for loans and the wide spreads between yields on government securities and deposit rates made those securities the most profitable use of their funds,” the survey said.

Bankers also cited the uncertain economic outlook and the expectation of a rise in loan demand in the future as reasons for temporarily investing their deposits in government securities.