In an attempt to combat rising inflation, the US Federal Reserve has implemented the fastest interest rate increases since the eighties, which has had unintended consequences and serious side effects for banks.
The spike in withdrawals by U.S. bank customers led to the evacuation of $78 billion from bank accounts between July 5 and July 12, according to the latest data from the Federal Reserve’s Economic Data System.
Under the same circumstances, Silicon Valley Bank (SVB) and Signature Bank were hit in March by a huge cash outflow. First Republic Bank also had to borrow tens of billions of dollars from other banks to stay afloat.
The massive cash outflows came after two weeks of relative stability as major banks allocated substantial amounts to third parties to attract new deposits.
Collapse of SVB Bank
On March 1, SVB’s valuation reached $17 billion, with approximately $200 billion in customer deposits. Its clientele, mostly venture capital firms and the companies in which they invested, provided the bank with a solid foundation in a successful market.
The bank’s move to sell its depreciated Treasuries prompted panic, leading to a sudden withdrawal of $40 billion and causing SVB’s shares to plummet. This caused regulators to intervene and seize control.
Already in 2008, the global financial system faced a similar crisis triggered by the collapse of the US housing market.
This time, the Federal Reserve’s interest rate hike has once again put the US financial system in grave danger.
“With the Fed embarking on the most aggressive monetary tightening in 40 years, it seemed only a matter of time before something broke,” analysts at financial services group Macquarie Securities said.
Consequences of the mass cash exodus
Competition from money market accounts, which offer higher yields, is putting pressure on banks to step up their game.
Jamie Dimon, CEO of JPMorgan Chase, recently warned shareholders about the importance of meeting demands for higher rates in the banking sector and avoiding further deposit losses.
“Most of our firms have very little price power, and betas are rising,” he remarked.
According to the Federal Reserve, $742 billion in deposits were taken from the banking system in 2022, leaving US banks with a total of $17.28 trillion in deposits.
