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US Banks Brace for Deposit Exodus as Treasury Plans Massive Borrowing

In a concerning turn of events, financial analysts predict a substantial flight of deposits from US banks as the Treasury prepares to borrow over a trillion dollars to restore cash balances. According to JPMorgan analysts cited by the Financial Times, it is estimated that the US will need to secure $1.1 trillion in short-dated Treasury bills by the year-end.

The anticipated rise in government debt yields is expected to lure customers away from US banks, as their savings accounts offer increasingly inferior returns. With this impending exodus, customers will likely seek higher yields in alternative investment options. Gennadiy Goldberg, a strategist at TD Securities, succinctly remarks, “Everyone knows the flood is coming… Yields will move higher because of this flood. Treasury bills will cheapen further. And that will put pressure on banks.”

Gregory Peters, a co-chief investment officer of PGIM Fixed Income, warns that the withdrawal of deposits and subsequent yield surge could force banks to provide more attractive rates on savings accounts, subsequently squeezing small lending firms. He emphasizes, “The rise in yields could force banks to raise their deposit rates.”

Doug Spratley, head of the cash management team at T Rowe Price, echoes these concerns, noting that the Treasury’s plan to borrow trillions of dollars “could exacerbate stresses that were already on the banking system.”

Recent Federal Reserve Economic Data (FRED) system data supports these worrisome predictions. Since May of 2023, American banks have experienced an alarming deposit flight, amounting to nearly $910 billion as of the latest available data. In May of the previous year, banks held $18.06 trillion on behalf of depositors, compared to a reduced $17.28 trillion today.

The potential consequences of this deposit flight are multifaceted. US banks will face significant pressure to retain their customer base and prevent further erosion of deposits. To do so, they may be compelled to offer more attractive rates on savings accounts, which could create additional challenges for smaller lending institutions.

As the Treasury’s borrowing plans unfold, the banking system is poised for a turbulent period. Financial institutions must carefully navigate the complex landscape, balancing maintaining customer satisfaction and safeguarding their stability in these uncertain times.

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