Outflows of deposits from small banks paused last week, while outflows from large banks increased. This implies that funds continue to flow out of traditional banking and into money market funds or other alternative investments as investors search for yield.
The most intense portion of the banking turmoil appears to have abated even if the movement into cash warrants monitoring.
While it is too soon to declare the recent banking turmoil over, it appears that the most intense portion of the panic that started around March 8 has abated even if the movement into cash warrants monitoring.
Financial markets will continue to be sensitive to deposit flows, use of the Bank Term Funding Program and the Federal Reserve’s discount window, as well as to any other banks that require policy attention or fail.
The large gap between money market funds and bank deposit rates as well as what the banks themselves can obtain risk free at the Fed’s repo facility implies that cash will continue to move into the short end of the curve.
At the end of Friday, there was $2.375 trillion on hand at the Fed’s repo facility; as of last Wednesday, there was $5.19 trillion in money market funds.
Our preferred financial stress metrics suggest that risk around the large systemically important banks has ebbed. But financial stress remains elevated, and the unrealized losses sitting on the balance sheets of small and medium-size institutions will not abate for the foreseeable future.
This is why we continue to make the case that the $250,000 insurance ceiling for depositors is going to have to be addressed sooner rather than later given the strong probability of future issues inside the regional and community banking system.
On a seasonally adjusted basis, there is $17.3 trillion in total bank deposits in the U.S. banking system. That is $392 billion less than at the beginning of March.
U.S. banks lost $133 billion in deposits as of March 22 after losing a revised $129 billion the prior week, according to the latest data from the Federal Reserve.
But where is it going? Roughly $66 billion flowed into money market funds last week as investors and bank customers searched for higher returns on their money. Overall, $304 billion migrated into money market funds in March.
In seasonally adjusted terms, that corresponds to a loss of $126 billion in bank deposits as of March 22 and $174 billion in the prior week.
Large banks lost a seasonally adjusted $90 billion in bank deposits as of March 22, after gaining a revised $67 billion the previous week.
In contrast, small banks gained deposits of $6 billion as of March 22 after losing a revised $196 billion the prior week, both in seasonally adjusted terms.
Foreign bank deposits have dropped at a seasonally adjusted rate of $43 billion per week in the past two weeks.
In percentage terms, the deposits from large banks were dropping at an average annualized rate of 12% over the past four weeks. Compare that to the 38% average annualized rate of decline at small banks.