Unless deposit flight slows, more banks may run out of reserves like SVB

JPMorgan Chase, one of the world's largest banks, has warned that banks might be liable down the road, if they are allowed to withdraw cash from their deposits to cover their reserves.

‍

According to U.S. Federal Reserve data seasonally adjusted for inflation, a little over $300 billion of deposits have been withdrawn from domestic banks in a turbulent month of March.

‍

In addition to these developments, JPMorgan estimates that the money market mutual fund industry has experienced an increase in flows from investors seeking higher returns from money market funds of about $360 billion.

‍

“As a result of the pace at which deposits are losing to MMFs, we have to ask whether it is sustainable,” said JPMorgan strategist Nikolaos Panigirtzoglou in a client note sent out on Friday. It is possible that more US banks may experience liquidity issues similar to what happened to Signature Bank, Silvergate, and SVB if it continues for a prolonged period of time.

‍

As a result of spurts in demand for deposits, these three banks were forced to sell long-term assets at a loss in order to take advantage of the surge in demand for deposits, ultimately causing them to close as a result of further loss of confidence and accelerated run that ultimately resulted in their closure.

‍

It has created an issue for banks that are required to maintain a base of assets against their total deposits due to the ongoing deposit flight. JPMorgan called the current situation potentially dangerous because banks had to dip into their reserves to cover their capital requirements in the current situation.

‍

In a note published on Friday, the company said it was possible the banking system might have shrunk its balance sheet and lost liquidity (i.e. reserves) at the same time.

‍

A resolution on the debt ceiling has begun to be reached, and deposits are flocking to places that offer higher returns, increasing the urgency of the issue of reserves. Currently, the yield on money markets is around 4.57%, while the yield on savings accounts is about 0.23%, according to Bankrate data, although some banks are offering significantly higher rates on savings accounts.

‍

JPMorgan estimates that the Treasury Department would need about $440 billion to $540 billion in reserves to pay the government's bills if the debt ceiling issue is resolved.

‍

As the Fed began curtailing quantitative easing, then finally reversing it, bank reserves have declined dramatically. The level has fallen from around $4.2 trillion in September 2021 to just over $3 trillion now, a sharp decline from a peak of around that amount in September 2021. Almost $800 billion have been lost in bank deposits in the last year.

‍

There have been signs that the economy is stabilizing in recent days, which may have lessened the drawdown on reserves in recent weeks. Fed Chairman Jerome Powell said recently that there are signs of stabilizing of the economy.

‍