U.S. banks face the possibility of losing up to $1 trillion in deposits when the Federal Reserve finally pulls the plug on ultra-easy money and raises interest rates, according to the
Financial Times.
Such an outflow would reverse a five-year program in which huge amounts of extra cash poured into banks as the Fed flooded the financial system with liquidity. The liquidity enabled banks to survive the financial crisis that unfolded starting in 2008.
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“There are investors, traders and sell-side analysts that are very concerned about it,” one major investor in several large U.S. banks told the Times.
JPMorgan Chase estimates that money funds may pull $100 billion in deposits from its coffers alone in the second half of 2015 as the Fed winds down its asset purchases and raises rates to normalized levels.
Other major banks such as Citigroup, Bank of New York Mellon and PNC Financial Services are also trying to predict the impact of the Fed’s exit on institutional or retail depositors who might opt for higher-interest accounts or other investments instead of bank deposits.
One outcome is that banks may have to pay higher rates on deposits to keep customers, which would cut profits and could spur costly competition among the major banks.
“You essentially have frictionless non-interest-bearing deposits funding much of the banking system today,” said Peter Atwater, president of Financial Insyghts. “There’s no financial incentive to stay.”
The Times said banks also face the retreat of large institutional deposits as the Fed uses a new tool known as a “reverse repo facility,” or RRP, to normalize monetary conditions. The RRP allows non-banks such as money funds to have reserve accounts at the Fed.
The Wall Street Journal reported that the odds of a rate increase at the Fed's June 2015 meeting were 57 percent after this week’s Fed statement, up from 54 percent a day earlier, according to data from CME.
The Journal noted the economic report could be revised later, and that wage pressure remains contained, which should allow the Fed to be patient in raising interest rates in the short term.
In a column for
Seeking Alpha, Scott Minerd of Guggenheim Partners asserted that fears the Fed’s eventual hike in short-term rates will spur an “upward shock” in interest rates across the board are overplayed.
“The reality is that with international demand for U.S. Treasurys likely to increase and the size of incremental U.S. government borrowing expected to decline because of shrinking federal budget deficits, U.S. Treasury yields could move lower,” he predicted. The level of Treasury yields has a major impact on other debt instruments.
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