The nation’s banks and savings institutions are facing a severe deposit crunch.

Total deposits as a percentage of assets on hand at the end of September at the country’s more than 8,700 insured banks and thrifts reached the lowest level since the Federal Deposit Insurance Corp. was established in 1933. At the same time, the banking industry’s net interest margin – the difference between the average rate banks earned on their interest-bearing investments and the rate they paid to fund those investments – dropped to a 17-year low in the third quarter of 2006.

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