Thursday 28 Mar 2024
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KUALA LUMPUR (Sept 14): Deposits at US banks fell by a staggering record US$370 billion (RM1.67 trillion) in the second quarter of this year, the first decline since 2018.

In a report on Tuesday (Sept 13), The Wall Street Journal (WSJ) said that deposits had fallen to US$19.563 trillion as of June 30, down from US$19.932 trillion in March, citing Federal Deposit Insurance Corp.

It said the outflow in the quarter wasn’t a problem for banks, which were sitting on more deposits than they wanted.

Deposits in the banking system usually stay relatively stable, but have swelled by some US$5 trillion in the past two years due to Covid-19 pandemic stimulus.

Now, a series of US Federal Reserve rate (Fed) increases is taking some of that money out of the system, in part by decreasing demand for loans and increasing demand for government bonds. 

The WSJ said that when the Fed started increasing its benchmark rate this year, banks expected — and wanted — some customers to move their money to places offering higher interest payments, such as government bonds.

It said that as recently as April, many analysts scoffed at the idea bank deposits could decline this year.

But the Fed’s pace of rate increases has been faster than expected, and the effect on deposits is more pronounced. 

The deposit outflow will fuel a debate about how the Fed’s moves to tighten monetary supply and slow the pace of inflation are going to play out in a banking system flooded with liquidity.

Stimulus programmes during the pandemic nearly tripled the amount of reserves commercial banks held at the Fed.

The Fed wants to reduce those reserves as part of its efforts to take money out of the system, but only to an unknown floor that will keep markets liquid and functioning.

The WSJ said some analysts expect the decline in customer deposits to spur banks to hold fewer reserves at the Fed.

How fast that happens will carry implications for the Fed, including when it stops tightening and the ultimate size of its balance sheet.

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