Bank deposits are likely to decline for the first time since World War II

U.S. banks have been increasing deposits as a group, at least every year since World War II. It could break it this year.

Over the past two months, bank analysts have lowered expectations for deposit levels at the largest banks. The 24 companies that make up the KBW Nasdaq Bank Index are expected to see a 6% decline in deposits this year. According to Federal Deposit Insurance Corp., those 24 banks accounted for nearly 60% of $ 19 trillion in deposits in December.

Some analysts suspect a full-year decline will occur, a few months ago that would have been unthinkable even. Bank deposits during epidemics have grown at an unprecedented rate.

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By the end of February, analysts forecast a 3% increase. But, according to a FactSet data review, analysts have deducted $ 1 trillion from its estimate.

The rapid change in expectations is an important indicator of how the Federal Reserve’s hiking cycle is going down in the financial economy. Forecasts by central bank officials and economists are now calling for a sharp rise in the central bank’s key interest rate against inflation. It roams the banking sector in countless, somewhat unpredictable ways. How customers and businesses handle their savings will be one of the most meticulously observed results of the central bank’s operation.

“This is not a traditional Fed tight fit by any means – and there are no models that can give us answers even over the distance,” said JP Morgan Chase & Co. CEO Jamie Dimon wrote in her annual partner letter last week.

Monday, July 12, 2021 A customer uses an ATM at a Bank of America branch in San Francisco. (David Paul Morris / Bloomberg via Getty Images / Getty Images)

The collapse is not going to affect the banks. As large banks approached regulatory limits on their capital, the flood of deposits became a headache. Banks have already set aside many depositors because they could not work to borrow money.

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According to Barclays analysts, the industry has $ 8.5 trillion in deposits more than debt. While the demand for credit is expected to increase, banks need a deposit to lend, which is more than enough.

“These are deposits they don’t really need,” said Barclays analyst Jason Goldberg.

Bank shares fell as the Fed changed its views. The KBW Index started the year on a positive note as the S&P 500 fell. But it has lost almost 20% since mid-January and is now down 9.4% year-over-year, while the S&P 500 is down 5.8%.

Banks should benefit from the large beneficiaries of the slow and systematic increase in interest rates. It will allow them to charge higher fees on their loans and keep the deposits they pay close to zero. After all, banks do not overpay for funds they do not need. That combination would increase record-low profit margins.

The last time the central bank raised rates, deposit growth was low, but still positive, so bankers expected the same.

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But there is no precedent for what has happened in the last two years to set the stage for this year. During epidemics, consumers hoarded stimulus checks and businesses saved money to deal with shutdown and supply chain problems. According to FDIC data, total deposits have increased by $ 5 trillion, or 35%, in the last two years.

Inside the bank (iStock / iStock)

Analysts and bankers think they are unlikely to be around. Non-interest-bearing deposits of $ 500 billion to $ 700 billion in Citigroup-valued banks could move quickly.

Beneficiaries often hold money market funds, short-term investments, which are often overflowing deposits from banks.

Historically, customers and businesses have been slow to move most deposits from banks to chase interest rates. But the sheer amount of excess money can change that behavior, especially if the central bank moves rates faster than it usually does. The central bank is now expected to raise interest rates by half a percentage point at its next meeting, instead of the usual quarter-point increase.

“This will lead to a higher rate of awareness among consumers,” Deutsche Bank analysts wrote.

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The money market began to overflow with a new scheme at the Federal Reserve Bank of New York for short-term savings. The project, called the Reverse Repo, has been largely ignored since its creation in 2013, and now stands at about $ 1.7 trillion.

Night view of the logo of the Bank of America Tower. It is an American multinational banking and financial services company. (Roberto Machado Nova / Lightrocket via Getty Images / Getty Images)

Bankers and analysts are not sure what will happen to those funds as the central bank begins to move rates because it is so new and suddenly so big. For months, many saw them as excess funds that followed the general concept of “lost in, first out”.

Now, some researchers are changing that theory. They expect money-market funds to line up their rates with the Fed, which will be more attractive than bank deposits.

According to the FDIC, the average rate of savings accounts on March 21 was about 0.06%, compared to 0.08% for money market accounts. Savings account interest rates are not expected to move much until credit demand and deposit levels return to equilibrium.

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Isper Munir, Citigroup’s U.S. economist, said demand for the New York Fed’s plan has increased in recent weeks as expectations for big central bank hikes have surfaced.

“We need to fully revise our estimates,” he said. Munir said.

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