Ed’s Daily Notes for July 31st

Financial Times: US banks braced for large deposit outflows

US banks are steeling themselves for the possibility of losing as much as $1tn in deposits as the Federal Reserve reverses its emergency economic policies and raises interest rates.

JPMorgan Chase, the biggest US bank by deposits, has estimated that money funds may withdraw $100bn in deposits in the second half of next year as the Fed uses a new tool to help wind down its asset purchase programme and normalise rates.

Other banks including Citigroup, Bank of New York Mellon and PNC Financial Services have also said they are trying to gauge the potential effect of the Fed’s exit on institutional or retail depositors who might choose to switch to higher interest accounts or investments.

…An outflow of deposits would be a reversal of a five-year trend that has seen significant amounts of extra cash poured into banks thanks to the Fed flooding the financial system with liquidity. These deposits, which act as a cheaper source of funding, have helped banks weather the aftermath of the financial crisis.

Now the worry is that such deposit funding may prove fleeting as the Fed retreats. Banks might have to pay higher rates on deposits to retain customers – potentially hitting their profits and sparking a price war for client funds.

SNL Financial estimates that US banks have collectively increased their deposits by 23 per cent over the past four years, at the same time that their cost of deposit funding has dropped to a 10-year low.

…Banks also face the retreat of large institutional deposits as the Fed uses a new tool known as a “reverse repo facility,” or RRP, to stage its retreat. The RRP effectively allows non-banks such as money funds to have reserve accounts at the Fed.

This means the banks are facing a situation where a black swan event could put them back where they were in 2007-2008. But the government fixed everything, right?

Bloomberg: Argentina Declared in Default by S&P as Talks Fail

Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds.

The South American country failed to get the $539 million payment to bondholders after a U.S. judge ruled that the money couldn’t be distributed unless a group of hedge funds holding defaulted debt also got paid. Argentina, in default for the second time in 13 years, has about $200 billion in foreign-currency debt, including $30 billion of restructured bonds, according to S&P.

I doubt any of you have Argentinian bonds, but do you have stock in a company with a lot of dealings in Argentina? I would be highly concerned about that.