by Dave Allen, The International Forecaster:
A lot of news competing for our attention – financial, political and otherwise – as a new week unfolds:
- For the first time in our nation’s history, a former U.S. president has been indicted and will be arraigned in NYC tomorrow;
- Over 1,100 FDIC-insured U.S. banks were trading in risky derivatives in the 4th quarter, according to the Office of the Comptroller of the Currency;
- Just four banks – Goldman Sachs, JPMorganChase, Citigroup and Bank of America – held 88% of those derivatives’ face values, according to Pam and Russ Martens of Wall St. on Parade;
- OPEC+ announced a one million barrel per day cut in oil production, sending prices through the roof;
- Home prices suddenly jump after several months of falling. Is a sellers’ market about to return?
But here’s the story I want to highlight today:
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David Hollerith reports today that depositors pulled another $126 billion out of U.S. banks in the week ending March 22nd – primarily from the nation’s largest institutions.
The largest 25 banks in the U.S. by asset size lost $90 billion (on a seasonally adjusted basis), according to the Fed.
Smaller banks, which suffered a huge run the previous week as regional lenders Silicon Valley and Signature Banks were going bust, were able to stabilize their assets, gaining back $6 billion.
Total industry deposits fell to $17.3 trillion, down 4.4% from the same week a year ago – the lowest level since July 2021.
Hollerith says the new numbers reinforce some trends that were already in place.
For example, deposits had been falling at all banks before the Silicon Valley failure in the first two months of 2023. Deposits for all banks were also down 5% annually in last year’s 4th quarter.
Many observers attribute this systemic shift to pressure being applied by the Fed’s aggressive (obsessive?) campaign to bring down inflation closer to its 2% target.
During the early part of the pandemic, when interest rates were virtually zero, banks were drenched in deposits.
When the Fed started raising those rates last March to cool the economy, customers who had deposits began seeking out places with higher yields.
The first year-over-year deposit decline for all banks came in the 2nd quarter of 2022.
As we’ve pointed out, some of this money has been flowing to money market funds, which are offering investors a rate of return in the range of 4-5%.
Since January 1st, investors have poured over $500 billion into those funds, according to too big to fail Bank of America.
That’s the highest quarterly inflow since a peak earlier in the pandemic, and another $60 billion was added to these funds in the past week.
Government and banking officials have been working to prevent massive deposit outflows in the aftermath of last month’s bank failures.
Federal regulators pledged to cover all depositors at both banks they seized, hoping that would calm any panic, and also promised to help other regional banks if needed.
Eleven megabanks also decided to provide another troubled regional lender, First Republic, with $30 billion in uninsured deposits to stabilize its dire situation.
The challenge that outflowing deposits create for all banks is that if they raise rates on their deposits to keep or attract customers, their profits fall, making shareholders wary.
But if they lose too many customers, as SVB did, they lose critical assets and may have to sell assets, like long-term Treasuries, at a loss to cover withdrawals.
SVB customers withdrew $42 billion in one day, leaving the bank with a negative cash balance of $958 million, forcing regulators to seize the bank, which was the 16th largest in the U.S.
Are Reverse Repos to Blame?
In 2013, the Fed’s big concern was that, with the world inundated in dollars they had created, they wouldn’t be able to raise interest rates even when they felt they had to.
Their solution was a tool that ten years later has swelled to a massive $2.6 trillion (as of last Wednesday).
It’s making bank officials angry, because they believe it’s a major factor in their recent loss of deposits.
The Fed’s “overnight reverse repurchase agreement facility” (ONRRP) lets money market mutual funds accept vast sums of investors’ money and pay their customers higher interest rates than banks typically do.
That’s great for conservative savers who want higher yields on their cash but, as Neil Irwin writes, “is contributing to the destabilization of the banking system” as depositors pull their funds.
A decade ago, the Fed worried that when it decided to raise rates, it wouldn’t be able to actually change the price of money across the economy unless money market funds and other entities could access cash at that rate from the Fed.
The ONRRP was supposed to be a solution to that problem.
Irwin notes that it allowed money funds to park money at the Fed if there aren’t enough Treasuries and other super-safe investments available to buy at something close to the Fed’s target interest rate.
Irwin points out that usage of the reverse repo was zero two years ago but has soared as the Fed tightens. In fact, these repurchase agreements are now a major holding of popular money market funds.
For example, of the Fidelity Government Money Market Fund’s $246 billion in assets at the end of February, $136 billion (or 55%) were repurchase agreements with the New York Fed.
Banks view this as unwelcome competition. Their access to liquidity and safety from the Fed are threatened by the lightly regulated money market funds.
The Bank Policy Institute, the research arm of the bank-lobbyist-industrial complex, this week called the ONRRP “a black hole for bank deposits.”
The BPI’s Greg Baer and Bill Nelson argue that the reverse repo is essentially sucking money out of the banking system that would be put to more productive use for the economy – if it stayed in banks.
But Irwin argues this is largely the banks’ fault, because they’ve enjoyed the benefits (and resulting profits) of paying depositors rates that are far below the Fed’s policy rate.
And banks themselves have the ability to park money at the Fed and receive interest on it, in the form of reserves in excess of their regulatory requirements – plus, banks also have access to the ONRRP.
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