Impact of Stimulus on Bank Liquidity

Abstract

Economic uncertainty leads consumers to save and stockpile money (Ghosh and Ostry,1997). The U.S. Department of Commerce reports the percentage of savings to income has increased from 7.6% in January 2020 to 13.4% in December 2020 (Bureau of Economic Analysis, 2021). This led to significant rises in deposit accounts of banks across the country. At the same time, many companies facing uncertainty made cost-cutting measures, focusing on short-term liquidity. Delays on expansion and capital purchases reduced demand for commercial loans. Newly released data estimates 5.2 million businesses sought forgivable loans, like the PPP loans, to address their needs rather than using traditional commercial lending (New York Times).
Some financial institutions found themselves with large supplies of cash but diminishing demands for loans. How did banks respond and how did their actions affect their financials?
We examined the connections between ROA changes, bank size, provisions for loan losses changes, and the ratio of loans to deposits through careful regression analysis. We found that ROA was negatively correlated with bank size and the ratio of loans to deposits. The evidence implies that not all banks should follow similar tactics. They should always consider their own relative financial position before making these decisions. Our evidence suggests that small banks might benefit from finding any rare and/or little opportunity possible to loan more in a period of high liquidity but low loan demand while larger banks might benefit from finding ways to lower their loan portfolio in similar situations.