If only it weren’t stale.
Admittedly, I had a hard time getting excited about the Fed’s H.8 release this week. It reflected the state of affairs in the US banking system as of March 22. That delay is suboptimal in the current circumstances for obvious reasons.
On top of that, the latest vintage included an eye-watering (and thereby difficult to interpret) revision for the week ending March 15. That was, of course, the week — i.e., the period capturing SVB’s failure, Signature’s closure and panicked efforts to shore up midsize lenders’ liquidity and reestablish public confidence.
The revision reflected a “change in the way FDIC bridge banks were incorporated in the small bank data,” the Fed said. In the initial release, small banks bled $120 billion in deposits+. The same series now reflects an exodus approaching $200 billion.
It was huge either way, but with the revisions, the drop in small bank deposits from March 9 through March 15 produces a visual so anomalous as to be mostly incomprehensible.
Note that small banks actually picked up some deposits the following week — around $6 billion. In a stark turnaround from the prior period, larger banks lost deposits in the week ended March 22.
Again, these figures capture the first two weeks of America’s mini-banking crisis which will be four weeks old as of next Wednesday. The Fed’s H.4.1 release reflects levels as of March 29, and the latest vintage of that report showed+ emergency borrowing from Jerome Powell was mostly stable for a third week (it actually receded a bit). Meanwhile, FHLB issuance has normalized.
So, with the H.8, we’re really just looking at an iPhone video of a forest fire that’s since been brought generally under control, even as some areas are still burning and smoldering. Overall deposits dropped another $126 billion in the week to March 22, bringing the four-week total to $389 billion.
There’s no mystery as to where that money went. Over the same four-week stretch, money market funds took in a net $312 billion. If you include the latest data on money market fund flows, the five-week net haul comes to $378 billion (note in the visual that the blue shaded area extends one week beyond the red bars depicting deposit flight — that’s the same delay noted above).
Here are a few key questions and points:
- How are banks (and particularly small- and midsize banks) supposed to compete with money market funds?
- If they can’t compete, and deposit flight continues, how are they going to fund outflows?
- If the answer to 2) is via Fed facilities, that’s fine, but isn’t a dynamic whereby banks are pledging “temporarily” impaired collateral (at par) for funding because depositors keep leaving unsustainable?
- If the RRP is part of the “problem,” and the Fed refuses to “fix” it by making the facility less attractive, then isn’t the Fed working at cross purposes with itself by providing liquidity to help banks meet withdrawal needs while simultaneously exacerbating the deposit flight by making money market fund rates more attractive?
- If the answer to 4) is “Well, yes, but the point is to force banks to compete for deposits,” that’s ok, as long as you understand that means margin compression, and also that margin compression means less credit to the real economy, more expensive credit to the real economy or both.
- If the whole point is to curtail credit growth to the real economy, then isn’t this just another example of policymakers adopting unrealistic expectations about their ability to control complex dynamics? Put differently: Implicit are some presumptuous claims about the Fed’s capacity to thread the needle between engineering a disinflationary pullback in credit creation and accidentally tipping more recession dominoes.
I could go on, and on. But I think readers get the point.
Going forward, and barring another flare up (i.e., assuming this turns into a slow-moving profitability crisis as opposed to a fast-moving meltdown), concerns will center around the scope and severity of credit tightening.
As alluded to in points 5) and 6) above, this looks like yet another example of policymaker hubris. The Fed seems to be assuming they can micromanage banks’ liquidity needs such that no one else fails, but everyone feels the squeeze.
Frankly, that exposes the disingenuous nature of claims about separating monetary policy from financial stability. This is all inextricably bound up with itself, both by nature and by definition.
“Another example of policy maker hubris”, I’m not sure I understand the criticism here.
I assume the policy makers indicted by this statement are the fed, not the long dead politicians who instituted the fed in the first place. I suppose I could be wrong in my read…
Assuming I’m right, what should the fed do to curtail inflation other than attempt to force a credit slowdown/ drop in monetary velocity? Or is attempting to control inflation at all pure folly?
What’s not to understand? They’re telling people that policy tightening to control inflation and the read-through of that same policy tightening for financial stability are two separate and distinct things, and that even if they aren’t (separate and distinct), they have the tools to manage the situation such that they can thread the needle — that they can engineer higher borrowing costs for Main Street by, among other things, using the RRP to compel banks to compete tooth and nail for deposits with money funds which, if you haven’t noticed, is a competition a lot of banks aren’t likely to win. Assuming (as they are) that they can manage this deftly without 1) something else snapping, 2) inadvertently causing a deeper lending contraction than they wanted to cause or 3) both, is hubris.
I realize you’re going to argue with me, because, over the years, you’ve demonstrated that that’s what you’re here to do. Which is fine, but I’ve adopted an unofficial policy towards your comments: You get one response from me per topic, and that’s it. From there, you’ll have to argue with yourself, or hope you can pull another read in.
I’m not arguing, I’m curious if you think the feds has viable alternatives.
If a doctor performed a risky surgery in a last ditch effort to save a patient, I would consider that hubris if there were alternatives. Granted, the doctor wouldn’t oversell the chances of success; but the fed obviously doesn’t have that luxury as public doubt would be self defeating.
My 2 cents: the Fed hiked interest rates very quickly (which I applaud), unfortunately necessitated by earlier hubris about “transitory” (and I’m on team transitory).
So these world class economists in charge of the world’s reserve currency are surprised that banks can’t compete with Money Market Funds?
Hubris (soft landing!) is declaring they have the tools to fight inflation while undoing QT by emergency lending to private banks by marking below-value assets as par …
What would be more humble: stop providing as much forward guidance, grandiose speeches, and explanations; just go by the data and raise interest rates and openly apologize that it’s going to hurt.
Excuse the newbie question, but could someone explain how come money invested in money market funds exits the banking system?
Money market funds are invested in T-bills, commercial paper, other very short term instruments, not in bank deposits. So withdrawing $1000 from deposit account (checking, saving, etc) to invest $1000 in a money market fund takes that money out of the bank.
Agreeing with John, and Banks can only lend based on deposits – no deposits means less liquidity for business activities (and likely less investors buying bank bonds).
H-Man. the viper tongue is moving. Small banks can work the treasury spread but it doesn’t pay like commercial/private loans. Right now small banks will work the treasury spread resulting in lower valuations.
Another newbie question, why can’t small/mid commercial banks offer money market instruments?
I don’t find much to argue with in your assessment of the situation re: banks and the Fed. Much of what I read in your commentary echoes things I have said myself re: the big picture, though admittedly you are coming from a higher level of sophistication than I have. What began to concern me, though, was the fact that my brokerage account value exceeds the $500,000 covered by the SIPC. After a bit of research into that situation, my understanding is that the $500,000 covers cash amounts, while the securities in a brokerage account will be transferred to another brokerage firm in the event my brokerage fails. (I don’t see that likely happening, but when bank runs are happening one has to consider worst-case scenarios.) Since I tend to sell when things go up and buy back when they’re down again, with a view to surviving on dividends in the event of a sideways or down move from here, I figure I’m okay. Yes, my net worth may fluctuate, and some of my investments may reduce their dividends in hard times, but all said, I should be okay unless the whole system falls apart. Any criticisms of that point of view?