At the start of May we explained that it’s not just the Fed’s rate hikes that are behind the nascent regional bank crisis(because with Fed Funds rate at 5.25% and both T-Bills and money market funds offering similar yields, there is no way small banks can compete with these returns, prompting a bank jog (which periodically turns to a sprint) and deposit flight from both checking and saving accounts).
We said that the Fed’s ongoing QT is a just as pernicious threat to the viability of small/regional banks because with every dollar drained from the system as part of the Fed’s quantitative tightening, a matching deposit dollar is also destroyed, to wit:
Under an ample reserves framework, virtually all deposits are created by the Fed.
That’s why banks were forced to load up on low-yielding securities during 2000-2001 and are now getting crushed as yields soar and fixed income/loan prices plunge.
It also means that under QT as Fed reserves shrink, deposits must follow: as such deposits are either forced to shift into Bills/TSYs or are destroyed (bank failures).
Thus, the bank crisis is an inevitable side effect of Fed tightening.… aka JP More-gain, which now has more than 13% of the nation’s deposits and 21% of all credit card spending: in other words, there has never been a bank that is more systematically important than JPMore-gain… and with every small bank failure, Jamie Dimon’s goliath is only getting bigger. Which is why we found it curious that none other than Jamie Dimon confirmed what we said three weeks ago during JPM’s Investor Day on Monday.
This is what the billionaire CEO said:
We haven’t been through Quantitative Tightening. So we really don’t know what’s going to happen to deposits at all [ZH; actually we do: deposits will shrink dollar for dollar alongside reserves]. And that’s why I’ve been quite concerned about that. I’m probably more concerned about quantitative tightening with anybody in this room.
We’ve never had QT before. It just started, okay? And you see huge distortions in the marketplace already. We’ve never had the Fed in the market like this with that RRP program that Jeremy mentioned ever. They have $2.3 trillion basically lent out to money funds. And I don’t know the full effect of that. And obviously, that’s a direct deduction from deposits are rolling out it made sense to do.
So I think people should build into their mindset that they may have to move deposit beta more than they think and manage that. So I mean, if I was any bank or any company, I’d be saying, can you handle higher interest rates and surprise in deposits, etc?
And this is how
JPM itself shows the impact of the shrinking Fed balance sheet and TGA/RRP liquidity drains soak up commercial bank deposits.