Tags: banks | Fed | deposit | outflow

FT: When Fed Raises Rates, Banks Could See $1 Trillion Deposit Outflow

By Dan Weil   |   Thursday, 31 Jul 2014 03:08 PM

When the Federal Reserve raises interest rates, banks tend to lag behind in increasing their deposit rates. That's likely to mean an outflow of funds for U.S. banks — to the tune of up to $1 trillion, the Financial Times reports.

Because of the lag, depositors will want to put their money in assets that earn more income.

JPMorgan Chase, the biggest U.S. bank by deposits, estimates that money-market funds alone may take out $100 billion of deposits in the second half of next year if the Fed hikes rates as expected.

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The potential outflow is raising worries across the banking community. "There are investors, traders and sell-side analysts that are very concerned about it,” a huge investor in several big banks, told the Times.

Low rates have helped banks by decreasing their cost of funding. U.S. banks have boosted their deposits by 23 percent over the last four years, while deposit rates have dropped to a 10-year low, according to SNL Financial, the Times reports.

But while higher rates will hurt banks on the funding side, rising rates will boost the income banks earn on their loans and bond holdings. So the net result may be positive.

Many economists think the Fed will start raising rates in the second or third quarter next year, but some experts think it should move earlier.

Dallas Federal Reserve Bank President Richard Fisher says the central bank should consider lifting rates early in 2015 or sooner depending on the economy's strength.

"I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose, too long," he writes in The Wall Street Journal.

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