- Larger charges, QT and trillions in uninsured accounts are pressuring susceptible banks, JPMorgan mentioned.
- Since SVB, $500 billion has flowed from smaller lenders to cash market funds and large banks.
- “An FDIC assure of all US financial institution deposits will surely assist, however it won’t be sufficient to fully cease this sediment shift.”
Deposits might proceed shifting out of much less safe banks, even with larger ensures from the federal government, JPMorgan analysts wrote in a be aware revealed Wednesday.
Susceptible US lenders have misplaced round $500 billion since Silicon Valley Financial institution collapsed, as depositors took their cash out in the hunt for safer havens, reminiscent of money-market funds and greater banks.
JPMorgan attributed that to 3 components: the Federal Reserve’s rate of interest hikes, its quantitative tightening program, and an estimated $7 trillion in uninsured deposits.
“An FDIC assure of all US financial institution deposits will surely assist, however it won’t be sufficient to fully cease this sediment shift,” JPMorgan mentioned.
Analysts famous that Fed charge hikes haven’t solely incentivized depositors to switch their deposits into higher-yielding cash market funds, however additionally they created losses in banks’ bond portfolios that made depositors nervous in regards to the security of their cash.
That was the case with SVB, and US cash market funds just lately noticed their largest cash features since 2020.
“Whereas cash market funds aren’t assured, they put money into the most secure and most liquid devices,” the analysts wrote. “In different phrases, not solely are cash market funds providing superior yields, however additionally they look safer than financial institution uninsured deposits.”
In the meantime, the central financial institution’s quantitative tightening insurance policies to take away cash out of the economic system have steadily eroded liquidity in banking, they added.
Earlier than the SVB disaster, $3 trillion in reserves have been held by the trade, however most of that was in foreign-owned banks and US giants. Only a fraction was in mid-size and small lenders.
“In different phrases from a liquidity standpoint, mid-size banks have been those most starved of reserves,” JPMorgan mentioned.
To make certain, an FDIC assure of all US financial institution deposits would assist ease fears in regards to the $7 trillion that is presently uninsured.
However to stem the outflow to money-market funds and to blunt the impression of QT, banks would want to supply extra aggressive deposit charges, and this might get tougher as rates of interest proceed to rise, in response to the be aware.
The upshot for the economic system is that banks might turn out to be extra cautious about lending, and smaller banks account for a disproportionate share of economic and private loans, JPMorgan mentioned.
“Non-financial company companies look much less susceptible as they might in precept as an alternative make use of debt capital markets to offset potential diminished financial institution lending, although that is clearly depending on market circumstances,” analysts added.
