Yesterday, the FDIC released first-quarter data that show no let-up in deposit inflows into the nation’s biggest banks, a torrent that comes in concert with lending activity still drifting in the economic backwaters. Last week in this memo, I concluded that all these deposits lie at the heart of JPM’s London-Whale investment. This doesn’t rationalize it or excuse the risk-management failings that contributed to the bank’s big loss. But, it’s the one thing I know so far about JPM from the facts in the case, facts that are the tip of an iceberg of growing risk for every large U.S. banking organization. Transfixed by all their Dodd-Frank work directed at all their old lapses, regulators haven’t yet done much to anticipate this new risk, but someone needs quickly to man the helm to steer the biggest banks into safer waters.

The press release accompanying the FDIC’s 1Q data suggests that deposit growth has faltered since the torrid pace set in 2011. A look behind the totals, though, shows a different picture. “International banks” – the biggest ones in the FDIC’s data set – saw deposit growth of 5.6 percent. Combined with “commercial lenders” – other large U.S. depositories – and the total deposit number is up 2.5 percent for these banks, rising from $5.5 trillion at the end of last year to $5.7 trillion at the end of March. This is, as noted, a slower pace than before, but it’s still pours deposits into banks already saturated with them. If these deposits went into new loans, then banks would be doing their thing as financial intermediaries, the economic recovery would be revving up and risk worries would go back to the old days, when credit risk was the demon that haunted the banking system. But, loans as a percentage of bank deposits sunk last quarter to a number not seen since 1984, posing the giant imbalance between liabilities and assets JPM sought to solve with its London bet.

Putting deposits into investments isn’t necessarily any more risky than putting deposits into loans – lots of banks have lost lots of money in “simple” loans like mortgages. But, it’s a different type of risk and not just because JPM apparently tried some very fancy financial-market footwork. Big deposit flows pose large risks at every big bank sputtering under the flood of them. The FT earlier this week provided an astute comparison of large U.S. bank strategy. It found that JPM invests considerably smaller amounts of its excess funds in USG and GSE obligations than peer banking organizations. Barclays and BofA were found to invest 95 percent of excess liquidity in Treasury and agency paper; JPM’s number came in around thirty percent for similar holdings.

From this, some conclude that only JPM is a high-flyer, and indeed it clearly is seeking more profit from its excess liquidity than others. But big banks also assume risk even when they hold nothing but sovereign obligations – EU banking crisis anyone? This risk comes not just from possible sovereign-risk worries – so far happily remote for the U.S. – but also from embedded interest-rate, duration and derivatives-related risk tied to big USG holdings. These risks are real, especially with interest rates at unbelievable lows, and they are exacerbated by current capital and liquidity rules that treat these USG obligations as risk-free even though they are far from it.

What should regulators be doing given this growing risk? First, they need clearly to understand it – I’m not at all sure that the U.S. regulators have looked beyond the USG sticker on big-bank investment books to wrestle with all the real risk embedded in them. There are lots of ways to gamble with “safe” assets on a bank’s investment book – fun and games in repos comes immediately to mind as do all sorts of proprietary trading left untouched by the Volcker Rule. Just because a big bank isn’t swimming with a London whale doesn’t mean its investment strategy is safe – in fact, JPM’s theory, diversifying USGs with some corporate obligations – is a prudent step if not taken to extremes designed for profit, not risk management. The more regulators push big banks into “safe havens” like USG obligations, the more correlated bank risk becomes in obligations exempt from capital and other prudential precautions. Banks need to invest these huge deposits and getting them out of the government’s coffers is good not just for the economy, but also for a sound banking system. So, regulators need not just to understand embedded risk on bank balance sheets, but also to promote effective asset-allocation and investment strategies that force banks to do one of two things: make loans or say no to new funds if they can’t find a safe place to put them.

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