The Ever-Shrinking Banks
ommercial banks are shrinking. Their total assets decreased by $69 billion, or 28 percent, between December 2018 and August 2021. Their term deposits plunged by $70 billion, or 45 percent over the same period as customers lost confidence in the sector and could no more engage in long-term commitments. Overall deposits decreased at a slower pace (24 percent) to $131 billion since the sharp decline in term deposits was partly offset by a surge in demand deposits which increased by nearly $29 billion. The drop in customer deposits, which is the main bank liability, and the planned increase of their capital, as required by BDL, are deleveraging the banking sector and reducing its default risk. The decline on the liability side of the banks’ balance sheet was paralleled by a corresponding decline on the asset side. Loans to resident customers dropped sharply between December 2018 and August 2021, especially those denominated in foreign currencies which plummeted by 57 percent. The fall in the banks’ domestic credit portfolio partially reflects the fact that customers were settling loans backed by real estate collateral by using deposits locked up in bank accounts. The banks’ Eurobond portfolio more than halved from $16 billion at the end of 2018 to $7.7 billion at the end of August 2021, as the banks reduced their exposure to public debt by selling it at great discounts to foreign funds, as well as taking large provisions on their value (45 percent). Their Eurobond holdings currently have a nominal value of $11.6 to $11.8 billion. They also decreased their holdings in Treasury bills (see Money Supply section). The banks, however, remain highly exposed to BDL.
