Banks' deficits of Bermuda dollars are at their highest for two years according to the latest figures released by the Bermuda Monetary Authority.

The total amount of $3.9 billion they are loaning out is $494 million, more than the $3.4bn they hold in deposits.

Meanwhile the number of new insurers registering on the Island has declined to 13 for the first quarter of 2007 after 34 set up in business for the final quarter of last year.

A worrying trend of banks lending out more than they collect in savings deposits has continued since the third quarter of 2005, when banks had a surplus of $230m, with the deficit gap widening quarter-on-quarter from minus (-) $6m in the fourth quarter 2005 to minus (-) $311m in the final quarter of last year.

In accordance, the percentage of deposit liabilities lent soared from 93.5 percent in the third quarter of 2005 to 114.5 percent in the first quarter this year.

The situation has been created by a rising demand for mortgages and loans allied to a construction boom, which, in turn has resulted in increased competition between lenders and the introduction of 100 percent mortgages requiring no down-payment.

The amount being borrowed has subsequently increased due to Bermudians buying properties as long term investments and taking out home equity loans against the rising value of their homes.

Previously the BMA, the country's financial regulator, claimed the statistics reflected the strength of the Island's economy and low interest rates, with loan growth outstripping the growth of Bermuda dollar deposits following the firming up of US rates due to the US Federal Reserve's action on interest rates.

As a result the surplus stock of Bermuda dollars held in the banks has been reduced, resulting in the use of their excess liquidity held in US dollars to support the growth of Bermuda dollar lending.

They said banks are pursuing lending and reserve management policies which do not place undue risk on their overall capital positions.