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March 29, 2023

Monitoring US bank deposit flows with Macrobond: a moment for (cautious) optimism

After the SVB turmoil, Ashridge looks at flows between banks, the Fed and money markets in 15 charts.
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Ashridge Macro
London-based independent research and strategy firm
Ashridge Macro is a London-based independent research and strategy firm. 
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Flows from small banks to large banks and into money market funds have been much higher than usual, but remain small relative to the size of overall deposits. While it's too early to say whether we're out of the woods, the flow data so far is (very) cautiously encouraging.

US banking turmoil made headlines in March. Using Macrobond, we tracked the latest data to get an idea of how the situation is evolving. 

Weekly banking sector flow data from the Federal Reserve (the H8 release) shows a large weekly rotation of deposits from small banks to larger institutions. But the scale of the rotation so far remains small compared to the size of small banks’ overall deposits. Looking at the Fed’s balance sheet, use of the discount window remains high but is declining. Banks may be sitting on cash as a precaution. 

Money market funds (MMFs) saw another week of elevated inflows, mostly from institutions. However, flows to MMFs also remain small relative to the deposits of the banking sector. 

In the fourth quarter, households withdrew deposits from banks and deployed cash directly in the US Treasury markets. Household participation in bill auctions strengthened somewhat further after the collapse of Silicon Valley Bank. 

The most recent H8 data, which covers the week ending March 15 (SVB failed on March 10) shows a USD 53.2 billion decline in the overall deposits of domestically chartered banks over the course of the week – an overall flow which is not abnormal compared to recent history. 

The data highlights a rotation of deposits away from small banks and into larger institutions. USD 119.9 billion was withdrawn from small banks, while USD 66.7 billion was deposited into larger institutions (defined as the top 25 by domestic assets). Relative to the overall size of deposits at small banks – around USD 5.4 trillion – it appears as comparatively modest. But historically, this is an exceptionally large reduction – a 15.7 standard deviation – and the largest single weekly drop in the history of the data. 

What the H8 data doesn’t highlight explicitly is a degree of deposit rotation which likely took place within the largest banks (a category in which SVB was included). We’d conjecture that the very largest banks likely saw disproportionate inflows. 

This chart shows how small banks built an ever-greater share of total deposits since mid-2020 – until that trend abruptly reversed.

Banks are likely sitting on precautionary cash

Large banks saw their total assets grow by USD 318 billion in the week ending March 15, USD 305 billion of which was accounted for by an increase in their cash holdings. Commercial and industrial loans and real estate loans on the asset side grew at a comparatively healthy pace over the course of the week. 

The net deposit inflow is clearly visible on the liabilities side of the large banks’ balance sheets (as are USD 251 billion worth of borrowings likely driven by the “bridge bank” that has succeeded SVB after the FDIC’s intervention). 

The next two charts show the equivalent trends for small banks. Their assets increased by USD 117.8 billion, outpaced by the USD 132.1 billion increase in their liabilities. The depositor outflow is self-evident.

This was offset by a sharp USD 252 billion increase in small banks’ borrowing obligations – likely using the discount window and other rapid means of accessing liquidity. 

There was also a modest increase in large time deposit liabilities. The asset side shows a marked increase in small banks’ cash holdings – cash increased by US 96.6 billion, despite the deposit outflows. Encouragingly, commercial & industrial and-real estate loans on small banks’ balance sheets both increased at a healthy pace over the course of the week.   

Reserves at the Fed increase; reverse repos are flat; discount window use falls

The Fed’s H.4.1 data is timelier than the H8, with its most recent release covering the week to March 22. On balance, it shows trends that are cautiously encouraging: 

  • Use of the discount window fell from USD 152.8 billion on March 15 to USD 110.25 billion on March 22. This suggests that next week’s H8 release may show a reduction in borrowing on the liabilities side of banks’ balance sheets.
  • Use of the bank term funding program (BTFP) rose from USD 11.9 billion on March 15 to USD 53.7 billion on March 22. 
  • “Other” credit extensions from the Fed , in light blue, rose from USD 143 billion to USD 179.8 billion. This category includes collateralised lending to bridge banks established by the FDIC, and the increase likely reflects this.  

As the next chart shows, reserve balances at the Fed jumped by USD 174 billion in the week to March 22, having seen large increases the prior week as well. This reinforces the general impression from the less timely H8 data that banks may be sitting on cash they borrowed as a precautionary measure. 

Despite larger-than-usual weekly flows into money market funds overall since SVB’s failure, overnight reverse repo (RRP) usage was flat in the week to March 22, as the second chart shows.

Money-market fund flows are large in relative terms – but absolutely small

The Investment Company Institute publishes money market data on Thursdays. The latest release shows flows for the week ending March 22. 

For the week ending March 15, money market funds saw USD 120.9 billion worth of net inflows, almost all of which (USD 100.8 billion) was from institutional depositors. The week ending March 22 saw a similar size flow with similar investor composition:

  • USD 117.4 billion was deposited overall, USD 102.2 billion of which came from institutions. The retail flow was comparatively small, at just USD 15.2 billion – down on the prior week and comparable to levels before the failure of SVB. 
  • Taxable government money market funds dominated overall allocations at USD 131.8 billion. Tax-exempt and prime funds saw outflows for the second consecutive week. 
  • MMF inflows remain counter-seasonal: generally, at this time of the year, MMF balances draw down before being replenished later in the year. 

Despite the fact that these are relatively large week-on-week flows, they appear small in absolute terms. (Total deposits across all banks, large and small, amount to more than USD 16 trillion; money-market assets surpass USD 5 trillion.)

Auction results: strengthening demand, but nothing abnormal

Money market funds are major holders of bills and also park cash in the RRP. In addition to participating in bill markets indirectly via MMFs, households have increasingly participated directly in recent quarters. 

As the next chart shows, during the fourth quarter, households purchased around USD 1.6 trillion worth of Treasury securities directly – funded via USD 1.46 trillion worth of deposit redemptions, sales of corporate and foreign bonds, and divestment from mutual funds. 

Allocations to money market funds were trivial – just USD 10 billion over the course of the quarter. With T-bills offering attractive and essentially risk-free returns – and given the prospect of avoiding fees by holding them directly – households’ direct allocations to MMFs have been declining since 2021. 

Examining recent bill auction results can give a sense of how demand for bills is increasing. That in turn gives indications about money market fund demand and the extent to which households are choosing to allocate to bills directly. 

The chart below plots the bid-to-cover of recent T-bill auctions, overlaying one-month and two-week moving average bid/covers weighted by the amount of bonds allotted. Bid-to-covers have been weakening since mid-2021. While some auctions last week were stronger than the week before, bid to covers post-SVB do not yet suggest materially stronger demand for bills in total. 

Household bill demand has moved somewhat higher since then, as our final charts suggest. 

The chart below plots the percentage of accepted bids at each auction via Treasury Direct, the US government’s investment portal, along with auction-size-weighted moving averages. Interestingly, households appear to have a fairly persistent bias towards participating in 4-week bill auctions versus other maturities. 

The one-month moving average has been trending higher since the start of 2022, suggesting increased household participation in bill markets, consistent with Fed data. The most recent auction results show the two-week weighted moving average inflecting slightly higher, suggesting that even more households are participating since the onset of banking sector stress. 

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