Money-market fund assets hit new highs this week as interest rates above 5% lure investors as the Federal Reserve appears determined to keep them higher for a while.
About $14 billion flowed into money market funds in the week to Aug. 30, according to data from the Investment Company Institute. Total assets reached $5.58 trillion last week, up from $5.56 trillion. This is the highest since the data were first collected in 1992.
This is not great news for banks that have struggled to hold on to deposits for the past year, especially after three giant lenders defaulted in the spring.
Since the beginning of January, deposits at all US banks have fallen by $371 billion, according to data from the Federal Reserve, while money market funds have increased by more than $769 billion. Disbursements slowed in the summer months, but deposits were still down for the big banks as of late June.
The biggest flight risk is still from the rich. Deposits from wealth management and corporate accounts fell nearly 13% this year through July, according to data provider Kurinos, though both were stable in July. August data is not yet available.
In comparison, mass market consumer accounts fell just 1.8%.
Tim Coffey, a banking analyst with Janney Montgomery Scott, said: “Ironically, the most worrisome banking client is the very liquid high-net-worth client. “The biggest concern is the low balance, low income families.”
The intense competition to retain these deposits is one of the many challenges facing an industry faced with high interest rates, rising funding costs and eroding profitability.
In recent weeks, Moody’s Investor Service and S&P Global have each downgraded their credit ratings for mid-cap lenders, meaning debt investors can expect bigger yields by holding onto their bonds.
Large lenders face new demands from regulators to set aside more capital and sometimes issue more long-term debt to offset potential losses. Another concern is the increase in credit card debt and delinquencies can cause excessive losses in the near future.
U.S. bank stocks ended August with their worst monthly performance this year since March, amid turmoil for the industry. The industry’s KBW Nasdaq Bank Index (^BKX) fell 8%, while the KBW Nasdaq Regional Bank Index (^KRX) fell 9%.
The pressure on the industry started in 2010. In 2022, the Fed’s aggressive campaign to cool inflation with higher interest rates has reduced the value of bonds held by many institutions and forced many institutions to pay more to attract or retain deposits.
This has reduced profitability and increased financial difficulties. Silicon Valley Bank, Signature Bank and First Republic failed in the spring because depositors withdrew their money en masse.
S&P said last month that many depositors were moving their money into high-interest accounts, raising banks’ funding costs. “The decline in deposits has squeezed liquidity for many banks, as the value of their securities – a large part of their liquidity – has fallen.
FDIC-insured banks fell 2.5% in the first quarter of the year. At the same time, they decreased by 8.2%.
“If you’re a bank, if you don’t offer competitive pricing, there’s some flight risk,” Piper Sandler banking analyst Scott Sifers told Yahoo Finance.
Big banks benefited from the early spring chaos and deposit outflows as customers sought safety. But they also started losing deposits to smaller banks that offered higher rates or money market funds. And wealthy customers have become harder to retain.
JPMorgan Chase ( JPM ), Wells Fargo ( WFC ), Bank of America ( BAC ) and Citi ( C ) reported outflows of deposits in their wealth management units in the second quarter. JPMorgan and Wells Fargo had 11% drops, far greater than total deposit outflows for the same period.
In mid-August, these four giant banks issued new short-term CD “specialists” in an effort to remain competitive on price. JPMorgan Chase offers up to 5% annual yield for 6-month CDs.
Ken Tumin, senior analyst at LendingTree, said the increase would put pressure on smaller banks that monitor bank rates.
“They’re definitely getting squeezed,” Tumin added.
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