$2.5 trillion expected decrease in cash reserves… What are US banks facing?

Fitch Ratings said that severe measures imposed by the US Federal Bank could withdraw trillions of dollars from the US banking system and intensify credit pressure.

“System-level indicators of bank liquidity remain strong, but our baseline expectation is for reserves to decline significantly by $900 billion to $2.5 trillion by the end of 2023,” the ratings agency said.

absorb excess liquidity

Fitch added that this process could be accelerated if the use of the US Federal Reserve’s reverse repo facility – where the Fed sells securities to buy them back later at a higher price – rises, temporarily sucking cash out of financial institutions.

In addition to raising interest rates, there are other means, such as “quantitative tightening,” by which the Fed can slow down inflation. It aims to absorb excess liquidity in the economy by reducing the central bank’s balance sheet.

This is done by allowing maturing government bonds to “run off”, rather than being reinvested.

When it began shrinking its balance sheet in June, the Fed held nearly $9 trillion of these assets.

credit crunch

But in addition to the banking problems that occurred in March, the bank’s methods of reducing inflation may help fuel the credit crisis. Liquidity in the banking system is now strong, Fitch said, as lenders benefited from past quantitative easing policies, during which the Fed bought massive amounts of securities to fuel the economy.

But fears of a credit crunch have been on the rise since the collapse of the Silicon Valley bank in March, exposing vulnerabilities in the banking system and causing many depositors to withdraw their money.

“Quantitative tightening will put downward pressure on bank deposits, which will boost the loan-to-deposit ratio systemically,” Fitch said. “Liquidity tightening may exacerbate the ongoing shift to more restrictive credit terms, affecting the growth of the US economy.”

What is quantitative tightening?

Quantitative tightening (QT) is a contractionary monetary policy tool used by central banks to reduce the level of money supply, liquidity and the general level of economic activity in an economy.

Continuous decrease in deposits

And recent economic reports showed that US bank deposits declined over the past week, which indicates that the financial system is still fragile in the wake of a series of bank bankruptcies.

Deposits fell by $76.2 billion during the week ending April 12, according to seasonally adjusted data from the US Federal Reserve on Friday. The decline was mostly in large and foreign institutions, but deposits also shrank in small banks.

Meanwhile, commercial bank lending increased by $13.8 billion during the period after increasing by $10.2 billion in the previous week on a seasonally adjusted basis. Loans and leases fell $9.3 billion on an unadjusted basis, according to Bloomberg.

The Prince Fed report, known as H8, presents the estimated weekly aggregate balance sheet for all commercial banks in the United States, and economists are watching the report closely as a gauging document on credit conditions after the collapse of several banks, including Silicon Valley. bank last month.

Lending is key to business growth and spending, and tougher loan standards are expected to present an escalating headwind for the economy over the coming month. Nevertheless, this may contribute to curbing inflation rates in the United States faster than previously expected, according to the latest Bloomberg survey of economists.

Bank profits decline

The data followed the release of earnings reports this week for several regional banks, which said they expected to make lower profits from their lending activities this year. Kai Corp. and Fifth Third Bank Corp. were among those cutting their net interest income forecasts, while Zions Bancorp came in lower than expected.

However, banks including Fifth Third and Trust Financial showed that the most widely watched metric for the first quarter – deposit levels – remained very stable at a time when customer deposit withdrawals helped the collapse of 3 of its competitors.

And officials of the US Federal Reserve stated that the stricter credit conditions will help them to do their work, which may reduce the importance or perhaps the necessity of raising interest rates, which are expected – however – to be raised by monetary policy makers by a quarter of a point during their meeting scheduled for next month, as Inflation in the US is still very high.

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