NEW YORK–Just like credit unions, the nation’s banks are paying higher rates as they chase deposits. Moreover, borrowing in the federal-funds market hit $120 billion on Jan. 27, the highest one-day total in Federal Reserve data going back to 2016, according to the Wall Street Journal.
Activity in fed funds—used by banks and government-backed lenders to exchange cash reserves parked at the Fed—surged throughout the past year when the central bank raised interest rates at the fastest pace in decades, the Journal noted.
“Some banks are scrambling to borrow, looking to improve their liquidity and satisfy regulatory requirements while customers pull cash from savings accounts in search of higher-yielding products,” the Journal explained. “The typical fed-funds trade involves a Federal Home Loan Bank, or FHLB, lending cash overnight to a commercial bank.”
More Banks Dipping In
Traditionally, most borrowers have been foreign banks looking to make a few extra bucks by borrowing cheaply in fed funds, then leaving that cash at the Fed to earn more interest, the report added, noting that now more U.S. banks are dipping in, according to Bank of America, likely because such borrowing is looked upon favorably by regulators.
“Aggressive bidding by a subset of commercial banks has jacked up the cost of the priciest fed-funds transactions, New York Fed data show,” the Journal reported. “The highest borrowing rates are 0.15 percentage point above the Fed’s target range—now between 4.5% and 4.75%—and more than 0.3 point from the median, or the effective fed-funds rate. Essentially all trades were priced below the target range until October, before which no measurable portion had breached it since March 2020.”
The Journal reminded that if liquidity dries up substantially, the rate could surge, putting stress on banks’ and companies’ ability to fund their operations.
“Banks will tell you they don’t want to compete for funding,” Mark Cabana, head of U.S. rates strategy at Bank of America Global Research, told the Wall Street Journal. “But the Fed wants to tighten financial conditions, and this is one way to do that.”
Bleeding Deposits
The Journal report noted that U.S. banks bled deposits at the fastest rate on record in the second and third quarters of last year, according to the most recently available Federal Deposit Insurance Corp. data that goes back to 1984. Deposits fell by $206 billion to $19.357 trillion in the third quarter, extending the second quarter’s $370 billion decline. That marked the first time since 2010 that there were two consecutive quarters of declines, the Journal reported, adding that community banks are struggling most to match the higher rates offered by Treasurys and money-market funds.
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