Banks are offering higher payouts to secure their cash reserves from further depreciation and to shield against potential future runs on deposits, as stated by Bank of America Corp.

Both large and small financial entities have been taking these measures even before the upheaval in the U.S. banking system in March, as observed by strategists Mark Cabana and Katie Craig.

Data indicates that substantial time deposits, specifically certificates of deposit issued in sums exceeding $100,000, have surged by approximately $675 billion since the commencement of the Federal Reserve’s balance sheet reduction in June 2022.

Over the past 18 months, as the central bank initiated a series of interest rate hikes, cash has been steadily exiting the banking system in pursuit of higher-yield alternatives, Bloomberg reported.

Given the Federal Reserve’s commitment to maintaining current interest rate levels for an extended period and the ongoing outflow of deposits, the risk of depleting bank reserves is on the rise.

This scenario may compel the monetary authority to cease its quantitative tightening measures earlier than originally planned.

In the aftermath of the Silicon Valley Bank and Signature Bank failures, which left financial institutions feeling apprehensive, the Fed’s most recent financial survey, released in August, indicated that approximately 79% of respondents expressed a preference for maintaining additional reserves above the minimum comfortable threshold.

Furthermore, nearly half of these respondents noted an increase in borrowing from the Federal Home Loan Banks as a result of the challenges encountered in March.

Written by staff