Banking System Stress Persists as Deposits, Loans Decline Again

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from The Epoch Times:

Deposit outflows at U.S. banks accelerated recently, driven by the larger and smaller commercial financial institutions, according to new data from the Federal Reserve.

For the week ending May 10, total U.S. commercial bank deposits declined by $26.4 billion, or 0.15 percent, to roughly $17.123 trillion, the lowest level since July 2021. That represented the third consecutive week of rising deposit outflows as the fallout from the banking turmoil in early March persists.

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Large commercial banks (negative $21 billion) and small institutions (negative $2.6 billion) both saw declining deposit volumes on a seasonally adjusted basis. In addition, foreign-related banks reported a $2.1 billion drop in deposits.

Since the collapse of Silicon Valley Bank and Signature Bank, the Fed’s H.8 data show that total deposits have plunged about $476 billion.

The same report found that loans and leases decreased by $3.3 billion.

Despite the downward trajectory in deposits, CIBC Capital Markets Inc. economists don’t believe this is a worrying trend, writing that the latest figures paint a portrait of a banking system normalizing following sizable pandemic-era liquidity injections.

“Some of what we’re seeing is more a reversion to more normal conditions after ballooning liquidity during the pandemic,” bank economist Avery Shenfeld wrote in a recent research note. “The common perception is that a draining of deposits causes a drop in loans.

“While that’s a plausible story for any one institution, in the aggregate, there’s also a cause and effect in the other direction, in which a decline in loans outstanding is what actually causes a drop in aggregate deposits.”

Meanwhile, additional central bank data suggest that banks are still tapping into the Fed’s emergency lending facilities.

The institution’s H.4.1 figures—the Fed’s balance sheet—confirm that loans from the Bank Term Funding Program (BTFP) climbed to a fresh high of $87 billion for the week ending May 17.

Soon after the SVB and Signature failures, the Fed launched the BTFP, which allows borrowers to use Treasury and agency mortgage-backed securities as collateral for loans up to one year.

But while the raw data suggest that the banking system is still facing considerable stress, some public policymakers and market analysts assert that the worst is over.

Atlanta Fed Bank President Raphael Bostic believes the market stresses are subsiding, telling the regional central bank’s Financial Markets Conference on May 16 that “we’ve not seen this contagion take place.”

Fed Chair Jerome Powell Holds News Conference On Interest Rates
Federal Reserve Board Chair Jerome Powell delivers remarks at a news conference following a Federal Open Market Committee meeting in Washington on May 3, 2023. (Anna Moneymaker/Getty Images)

Fed Chair Jerome Powell reiterated at the Perspectives on Monetary Policy panel at the Thomas Laubach Research Conference on May 19 that the financial stability tools the central bank employed at the onset of the banking turmoil helped “calm conditions.”

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