A record surge in bank deposits has given U.S. lenders more cash than they know what to do with. One thing they don’t need: help from the Federal Reserve to fund the government-backed loans they made to small businesses.

Banks had tapped only $49 billion from the Paycheck Protection Program Liquidity Facility by May 27 as they loaned $511 billion, according to the central bank and the U.S. Small Business Administration. That’s largely because lenders are sitting on $1.8 trillion of new deposits that have flooded in since March 11 -- a 13% increase, and the biggest two-month jump since at least 1973, when comparable data is available.

“It looks like this excess liquidity in the banking system is going to stick around much longer,” said Brian Klock, a bank analyst at Keefe, Bruyette & Woods. “So if you don’t really need it, why get the Fed loan?”

Deposits have surged as drops in securities markets and interest rates for bonds and money market funds pushed savers and investors to banks. Also, a jump in corporate borrowing amid the pandemic has ended up as deposits back at the banks.

The Fed loans are pretty cheap at 0.35%, but then deposit costs have gone down considerably as well. Interest-bearing deposits cost JPMorgan Chase & Co. 0.52% in the first quarter, and Bank of America Corp. paid 0.47% while the average was around 1% for smaller lenders. Meanwhile, non-interest-bearing accounts made up about 30% of all deposits at the four biggest banks, giving them cheaper funding than the Fed’s rate.

Among the top U.S. firms, only Citigroup Inc.’s name showed up on the list of 574 banks that used the Fed’s lending facility as of May 6. Citigroup has borrowed $1.3 billion from the central bank to fund some of the $3.3 billion loans it had made by May 1. It had the highest deposit cost among the four biggest banks in the first quarter at 1.1%, and the smallest deposit base. A Citigroup spokesman declined to comment.

While the PPP loans stay on the banks’ balance sheets, they’re risk-free because the SBA guarantees payment -- and many will become government grants if companies meet certain criteria. Only a small portion are likely to mature to full term, KBW’s Klock estimates. Depending on how much of the loans are still outstanding and if liquidity gets tighter, banks can still access the Fed’s facility in the next two years.

One deterrent to borrowing from the Fed is political. Many banks probably want to stay off the list of borrowers to avoid the impression of government support for the industry, according to executives and others familiar with their decision-making.

ConnectOne Bancorp Inc., a regional lender in New Jersey, is among the top borrowers of the Fed facility, using $344 million of funds to cover about 75% of the PPP loans it has made. The bank has a 109% loan-to-deposit ratio. Small banks that are lending more than what they hold in deposits have to turn to other sources of funding, such as the Fed’s facility.

Even if the Fed’s lending or buying facilities are underutilized, they provide a backup for the market, Bank of America Chief Executive Officer Brian Moynihan said.

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