– The first wave of deposit outflows is nearly over. A second wave has already started, this strategist says:
The federal government’s efforts to backstop the banking system, and deals found to put SVB Financial and Signature Bank in new ownership, seems to have stabilized the financial sector, and calmed markets.
Joseph Abate, an interest-rate strategist at Barclays, says the Federal Reserve’s establishment of the Bank Term Funding Program as well as the abundant cash raised from advances borrowed from Federal Home Loan Banks has allowed banks to accumulate large buffers to meet deposit outflows. “And while market psychology is still fragile, our sense is that deposit outflows from small to large banks will fade as depositors recognize they can access and transfer their balances without any hitches,” says Abate.
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But Abate says a second wave of deposit departures has started — to money-market funds. Depositors generally have kept their money in banks despite paltry returns, usually thanks to the broad array of services that banks provide, as well as what Abate calls “deposit rate inattentiveness.”
“It is too hard to shift balances or to establish a new relationship with another institution unless there is a large, convincing yield pickup. But some of it could reflect the fact that after 15 years of near-zero rates, depositors are not in the habit of paying much attention to the yield on their cash balances,” he says.
Whatever the reason, depositors now see they can earn more yield in a money market fund with potentially less risk, Abate says.
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