Evening Brief – 05.02.23

US deposits have been falling as the Federal Reserve’s monetary policy and quantitative tightening pass through the system, with deposits at small domestic banks declining sharply following SVB’s collapse – the major banks have also seen an outflow of deposits.

Most of the deposit losses have been concentrated in savings and non-demand deposits. The amount parked in savings accounts, money market deposit accounts and other non-demand-deposit accounts has fallen nearly $2tn since the start of 2022, with money moving into higher-rate CDs and time deposits and leaving the banking system entirely for retail money market funds.

In place of those deposits, banks are borrowing a massive amount to cover their funding needs – aggregate borrowings have risen more than $400bn since March 1 and borrowings from the Federal Home Loan Banks have now exceeded $1tn for the first time since the Great Recession.

Meanwhile, direct lending to the banking system from the Federal Reserve remains elevated. Although discount window lending has tapered off slightly in the weeks since SVB’s collapse, aggregate usage remains much higher than at the start of the year. Banks are continuing to use the newly created BTFP to refinance against their long-term assets, and lending to the FDIC bridge banks for SVB and Signature remains elevated.

All that borrowing is better than if the Fed did not come to the rescue, but it means higher funding costs and reflects the broadening risks in the financial sector.