The FDIC's latest, "Quarterly Banking Profile Second Quarter 2023," tells us, "Total deposits declined $98.6 billion (0.5 percent) between first and second quarter 2023. This was the fifth consecutive quarter that the industry reported lower levels of total deposits. A reduction in estimated uninsured deposits (down $180.6 billion, or 2.5 percent) drove the quarterly decline. Estimated insured deposits continued to increase (up $84.9 billion, or 0.8 percent) during the quarter. The decline in total deposits in second quarter 2023 was nearly offset by increased wholesale funding (up $79.9 billion, or 1.5 percent) from the previous quarter. Wholesale funding as a percentage of total assets rose from 17.1 percent in the year ago quarter to 22.8 percent in second quarter 2023." (Note too: Last call for next week's European Money Fund Symposium, which will take place Sept. 25-26, 2023 in Edinburgh. For those attending, safe travels and see you in Scotland!)
It says, "Community banks reported a slight decline in total deposits of 0.1 percent ($1.5 billion) during second quarter 2023, down from growth of 0.5 percent reported in first quarter 2023. More than half of all community banks (60.3 percent) reported a decrease in deposit balances from the prior quarter. Growth in insured deposit accounts ($13.5 billion, 0.9 percent) was offset by a decline in uninsured balances ($14.2 billion, 2.1 percent). In the second quarter, growth in interest-bearing deposit balances ($16.1 billion, or 1.0 percent) was offset by a decline in noninterest-bearing deposits ($17.6 billion, 3.1 percent). Total deposits rose 1.0 percent ($22.5 billion) from one year ago. (See the press release, "FDIC-Insured Institutions Reported Net Income of $70.8 Billion in Second Quarter 2023.")
Accompanying, "Remarks by FDIC Chairman Martin Gruenberg on the Second Quarter 2023 Quarterly Banking Profile," quote the Chair, "Despite the period of stress earlier this year, the banking industry continues to be resilient.... But banks reported tightening net interest margins and funding pressures for a second consecutive quarter. In the second quarter, total deposits declined for the fifth consecutive quarter. However, deposit outflows moderated substantially from the large outflows reported last quarter when the industry experienced significant stress and two regional banks failed. The level of liquid assets declined in the second quarter through a combination of greater pledging of securities and a decline in liquid assets such as cash and securities, though most of the increase in pledging activity was for prudent liquidity contingency planning."
He states, "The next chart shows the quarter-over-quarter changes in the industry's yield on loans and cost of deposits <b:>`_. Both loan yields, the interest banks charge on loans, and deposit costs, the interest banks pay on deposits, began to increase in the second quarter of 2022 when market interest rates began to increase rapidly. Loan yields increased significantly more than deposit costs between second quarter 2022 and fourth quarter 2022. This trend reversed in the first quarter, as the banking industry reported a sizeable shift from lower-yielding accounts such as transaction and savings accounts into higher-yielding time deposits. Though the trend of depositors seeking higher yields continued in the second quarter -- which can be seen in deposit costs rising by 36 basis points -- loan yields more than kept pace as they increased by 39 basis points."
Gruenberg continues, "As I indicated earlier, the reason for the decline in the industry's net interest margin is that the cost of non-deposit liabilities, such as Federal Home Loan Bank advances and borrowings from the Bank Term Funding Program, increased significantly in the second quarter. The cost of non-deposit liabilities rose by 87 basis points to 4.0 percent, driving the industry's cost of funds to exceed the yield on earning assets. Community banks reported the same 36 basis-point increase in deposit costs as the industry in the second quarter, but their loan yields only increased by 28 basis points, putting downward pressure on net interest margins."
He comments, "The FDIC continues to closely monitor liquidity and access to funds across the banking industry. This chart shows liquid assets as a ratio of estimated uninsured deposits, which is one measure of a bank's ability to meet an outflow of deposits. This ratio increased significantly during the pandemic as bank deposits and liquid assets swelled, but has since declined back to more historical levels. The second quarter liquid-assets-to-uninsured-deposits ratio declined to 84.7 percent, which is below the pre-pandemic average. A substantial increase in pledged securities, the vast majority of which was for prudential liquidity contingency planning, drove the decline in liquid assets this quarter. A decline in securities portfolios and in cash and balances due from depository institutions also contributed to the quarterly decrease."
Discussing the "Quarterly Change in Deposits," Gruenberg says, "This chart shows that deposits declined for a fifth consecutive quarter. Total deposits were $18.6 trillion, down 0.5 percent quarter over quarter, a reduction from the 2.5 percent decline reported in the first quarter. In the second quarter, we observed the continuation of the trend in which customers are actively seeking higher yields. Lower-earning accounts such as transaction, money market deposit, and other savings accounts declined by $412.8 billion during the quarter, while time deposits increased by $306.7 billion. Brokered deposits increased by $177.4 billion, or 17.3 percent, during the quarter.... In the second quarter, uninsured deposits declined by 2.5 percent, far less than the 8 percent decline reported in the first quarter. By contrast, insured deposits increased by 0.8 percent during the second quarter, driven by higher insured brokered deposits and reciprocal deposits."
He then states, "There has been a great deal of discussion about deposit flows between the nation's larger banks, primarily under the assumption that deposits have flowed from regional banks to the largest banks. While deposit balances may have suggested that such flows occurred on a limited basis toward the end of the first quarter, that does not appear to have been the case in the second quarter. The nation's global systemically important banks reported a 1.2 percent quarterly decline in total deposits in the second quarter, primarily driven by a 3 percent decline in uninsured deposits. Rather than a simple story of deposits flowing to the largest banks, the second quarter's deposit story appears to have been more about pricing pressures from depositors seeking higher yields, often at nonbank financial institutions, particularly money market mutual funds."
Finally, his commentary adds, "Insured deposits increased by 0.8 percent during the second quarter, bringing year-over-year insured deposit growth to 4.7 percent. This growth of insured deposits more than offset the growth of the DIF balance, resulting in the reserve ratio falling by one basis point to 1.10 percent as of June 30. However, the banking industry still faces significant challenges from the effects of inflation, rising market interest rates, and geopolitical uncertainty. These risks, combined with concerns about commercial real estate fundamentals, especially in office markets, as well as pressure on funding levels and net interest margins, will be matters of continued supervisory attention by the FDIC." (See also, Bloomberg's "`Big Bank Borrowing Rebound Seen as Sign of Alarm on Reserves.")
In somewhat related news, Allspring's latest "Portfolio Manager Commentary" tells us, "In the government space, the stories of the summer have been the Treasury's drive to rebuild its cash balance (the Treasury General Account, or TGA) and how easy of a drive it has been. The TGA was dangerously low when the debt ceiling was resolved in early June, and investors were prepared for a nearly historic surge in Treasury bill (T-bill) issuance as the Treasury sought to restore a more comfortable cushion in the TGA. The open question was how smoothly the market could digest the large and rapid issuance at a time when the Fed's interest rate path was still unclear. Three months in, there hasn't been a hint of indigestion."
They write, "In that period, T-bills outstanding have grown $992 billion, from $4.0 trillion to $5.0 trillion.... The extra nearly $1 trillion of issuance hasn't all gone to TGA replenishment, though, as the U.S. operates at a deficit, especially in these summer months. The net result of all the government flows has been an increase in the TGA of $519 billion, to $542 billion on August 31 -- still short of the Treasury's comfort zone of about $650 billion, meaning elevated levels of issuance should continue into the fall."
Allspring comments, "The T-bills were easily absorbed by the market because there's an abundance of cash in the system -- a remnant of the Fed's efforts to boost the economy during the pandemic. As we've noted a few dozen times before, much of the extra cash is parked in the Fed's reverse repurchase (repo) program (RRP), and the owners of that cash have proven ready buyers of the extra T-bills. Over that same summer period, RRP usage fell by $603 billion, from $2.255 trillion to $1.652 trillion on August 31."
They add, "There are plenty of other moving parts in the money markets, not the least of which lately has been money sensibly moving from lower-yielding bank deposits to higher-yielding alternatives such as money market funds or T-bills themselves. That said, this summer's experience has shown that it's likely that so long as hundreds of billions of dollars reside in the RRP, extra T-bill supply will not be a problem for the market."
