Massive $78 billion cash flight rocks American banking system – Report

In an attempt to combat surging inflation, the Federal Reserve has implemented its fastest interest rate hikes since the 1980s, which has yielded unintended consequences with severe side effects for banks.

The spike in customer withdrawals from American banks saw $78 billion evacuated from bank accounts between July 5 and 12, according to the latest data from the Federal Reserve Economic Data (FRED) system. Under the same circumstances, Silicon Valley Bank and Signature Bank were hit in March by a huge cash drain. Also, First Republic Bank had to solicit tens of billions of dollars from other banks to stay afloat.

The massive cash flights came on the heels of two weeks of relative stability as major banks allocated substantial amounts to third parties to bring in new deposits.
SVB Bank Collapse

On March 1, SVB’s value was close to $17 billion, holding about $200 billion in customer deposits. Its clientele, consisting mainly of venture capital firms and the companies they invested in, gave the bank a strong foothold in a profitable market. The bank’s decision to sell its depreciated Treasury bonds sparked panic, resulting in the abrupt withdrawal of $40 billion, causing a sharp dip in SVB’s stocks. This prompted regulators to intervene and assume control.

Back in 2008, the global financial system faced a similar ruinous crisis triggered by a US housing market slump. This time, the Fed’s interest rate hike has put the US financial system in grave danger again.

“With the Fed undertaking the most aggressive monetary tightening over the past 40 years, it seemed a matter of time until something broke,” according to analysts at Macquarie Securities.

Consequences of Massive Cash Exodus

Competition from higher-yielding money market accounts is pressuring banks to step up their game.

Jamie Dimon, the CEO of JPMorgan Chase, recently warned shareholders about the importance of meeting higher rate demands in the banking sector and avoiding more deposit losses.

“There is very little pricing power in most of our business, and betas are going to go up,” he said.

The Federal Reserve Bank reported that $742 billion worth of deposits were withdrawn from the banking system in 2022, leaving US banks with a total sum of $17.28 trillion in deposits.

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