Banking System Stress Persists as Deposits, Loans Decline Again

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.

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 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.”

Western Alliance Bancorporation recently supported these arguments after a May 15 Securities and Exchange Commission (SEC) filing confirmed that deposits rose by more than $2 billion in the three months to May 12.

Shares of the regional bank tumbled 2.44 percent during the May 19 regular trading session, but the stock recorded a weekly gain of about 25 percent.

U.S. regional bank stocks slumped to finish the trading week after two sources close to the situation told CNN that Treasury Secretary Janet Yellen warned bank CEOs at a recent meeting that more mergers might be necessary.

Yellen met with more than two dozen bank CEOs and executives at a meeting convened by the Bank Policy Institute (BPI) on May 18. Despite a statement reaffirming the strength of the banking system, the Treasury Department didn’t mention these remarks.

The KBW Nasdaq Regional Banking Index fell a little more than 2 percent, while PacWest Bancorp declined almost 2 percent.

If Yellen’s remarks are accurate, new mergers will continue the trend of declining competition in the U.S. banking system. At the end of 2022, there were 4,135 commercial banks, down from the peak of 14,469 in 1983, representing a 71 percent decline over four decades, according to the Federal Deposit Insurance Corp. (FDIC).

The Treasury’s cash balance in its bank account at the Federal Reserve is also heading lower as the department tries to prevent a default on the federal government’s debt. The latest update to the Treasury General Account (TGA) Opening Balance for May 18 stood at $68.332 billion, down from $94.629 billion and $316.381 billion at the start of the month.

Article from our premium news partners at The Epoch Times.