Deposits Surge at U.S. Banks Helped by Fed Actions; Cash Largely Sitting on the Sidelines

DBRS, Inc. (DBRS Morningstar) published a commentary highlighting the continued strong deposit growth at U.S. banks. Most banks are primarily purchasing short duration high quality liquid assets (HQLA), leaving large balances parked at the Federal Reserve (Fed), or both. As a result, this growth is adding to the significant net interest margin pressure seen at banks following the Fed cutting rates to zero. Overall, we view the outsized deposit growth as enhancing on-balance sheet liquidity.

Key highlights include:

-- Most banks continue to report outsized deposit growth, following on from the significant growth already reported in 1Q20.
-- Unprecedented levels of support have seen the Fed’s balance sheet balloon to over $7 trillion at July 1, 2020 from $4.2 trillion at the start of March, an increase of approximately 65%. While not nearly as rapid, deposits at commercial banks have significantly risen as well. According to the St. Louis Fed, commercial deposits grew from $13.4 trillion in February to $15.5 trillion in June, the latest data available, representing an increase of $2.1 trillion, up by 16%.
-- Until these deposit balances start being spent or invested in the real economy, it is hard to foresee a robust economic recovery.

“In the aggregate, consumers, businesses and other institutions are increasing their deposits. This increase in precautionary balances is prudent given the continued uncertainty around the pandemic and its ultimate impact on the economy,” notes Michael Driscoll, Managing Director, Head of North American FIG. “Continued build-up in these deposits would indicate that uncertainty about the future remains high.”

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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