In a stunning turn of events, new data from the Federal Reserve reveals that deposits at US commercial banks have finally increased for the first time in a month. This is a sign that the banking system is stabilizing after two of the largest bank failures since the financial crisis have rocked the industry and made depositors nervous. The increase marks an end to the record flight of deposits that occurred after the collapses of Silicon Valley Bank and Signature Bank in mid-March, which was feared to put any funds in excess of the $250,000 per depositor federal insurance limit at risk.
The second and third largest bank failures in US history forced federal regulators to guarantee all deposits at both institutions and prompted the Fed to take emergency actions to restore confidence in the banking system. Deposits rose at both large and small banks, with small banks being hit particularly hard by the outflows after the back-to-back failures. It is a positive sign that both types of banks saw an increase in deposits.
The recent banking turmoil has exacerbated worries that the central bank’s aggressive tightening may trigger a recession. Over the last year, the Fed has implemented sharp interest rate increases to slow the economy and cool inflation. Economists and policymakers are closely monitoring the Fed’s weekly snapshot of the financial condition of the country’s banks for signs that deposit flight has run its course, as well as for indications that lenders might start to rein in credit as a result. If this happens, it could accelerate the onset of an economic slowdown or make it worse.
Overall credit from US banks did decline by a record of over $120 billion in the latest week. However, this was largely the result of banks divesting $87 billion in securities to nonbanks, such as hedge funds. The Fed stated that banks had offloaded that amount of assets in each of the two latest weeks, most of it coming in the form of Treasuries and mortgage-backed securities. The moves coincided with recent sales of various assets of the two failed banks under the direction of the Federal Deposit Insurance Corp, but the Fed did not specify if that was the impetus for the divestitures.
Lending to businesses and consumers by banks held steady with $12.07 trillion in loans outstanding as the month neared its end, up fractionally from a week earlier. Loans for both commercial and residential real estate, and for commercial and industrial loans, each fell marginally. However, the declines were offset by a pickup in consumer loans led by credit card balances.
The rise in deposits at US commercial banks is a welcome sign for the financial industry after the recent turmoil. The fact that both large and small banks saw an increase in deposits is especially encouraging. However, the banking system remains fragile and economists and policymakers will continue to monitor the situation closely for any signs of trouble.
