Money market fund assets hit a new all-time high this week as interest rates above 5% continue to attract investors as the Federal Reserve appears determined to keep interest rates high for some time.
About $14 billion flowed into money market funds in the week ending Aug. 30, according to data from the Institute of Investment Firms. Total assets amounted to $5.58 trillion, compared to $5.56 trillion in the previous week. This is the highest total since data were first collected in 1992.
This is not great news for banks that have been struggling to retain their depositors over the past year, especially since the failure of three major lenders in the spring.
Since the beginning of January, deposits at all US banks have fallen by $371 billion, according to Federal Reserve data, while money market funds have risen by more than $769 billion. Those outflows slowed over the summer, but deposits remain low for major banks since the end of June.
The biggest escape risk is still from the wealthy. Deposits from wealth management and corporate accounts are down about 13% so far this year through July, according to data provider Corinos, although they were flat through July. August data not yet available.
By comparison, mass market consumer accounts fell by just 1.8%.
“Ironically, the bank’s most worrisome customer is the one that is highly liquid and has a high net worth,” Tim Coffey, bank analyst with Janie Montgomery Scott, told Yahoo Finance. “Least of concern are low-credit and low-income families.”
The intense competition to keep these depositors is one of the many challenges facing an industry plagued by high interest rates, rising financing costs, and eroding profitability.
In recent weeks, both Moody’s Investors Service and Standard & Poor’s Global have downgraded the credit ratings of a number of medium-sized lenders, meaning that debt investors now expect a higher yield from holding their bonds.
Larger lenders also face new demands from regulators to set aside more capital and, in some cases, issue more long-term debt to absorb potential losses. Another concern is that high credit card debt and late payments can lead to huge losses in the near future.
US banking stocks ended August with the worst monthly performance of the year since March, at the height of industry turmoil. The KBW Nasdaq Bank Industry Index (^BKX) is down 8% while the KBW Nasdaq Regional Banking Index (^KRX) is down 9%.
‘flying hazards’
The pressure on the industry began in 2022 with the Fed’s aggressive campaign to cool inflation with higher interest rates, which in turn drove down the value of bonds held by many institutions and forced many institutions to pay more to attract or hold deposits.
This, in turn, led to lower profits and increased risks of liquidity problems. Silicon Valley banks, Signature Bank and the First Republic went bankrupt in the spring largely because depositors pulled out their money in a mass exit.
Last month, Standard & Poor’s said many depositors had “shifted their money into higher-interest accounts, driving up banks’ funding costs.” “The decrease in deposits has led to liquidity pressure in many banks, while the value of their securities – which constitute a large part of their liquidity – has decreased.”
Deposits with FDIC-insured banks fell 2.5% in the first quarter of the year, the largest quarterly decline since the regulator began collecting data in 1984. The drop in uninsured deposits was much deeper; They fell by 8.2% for the same period.
“If you’re a bank and don’t offer a competitive rate, there is some escape risk,” Scott Sievers, banking analyst with Piper Sandler, told Yahoo Finance.
Major banks initially benefited from the spring’s chaos with deposit inflows as customers sought safety. But then they also started losing deposits to smaller banks offering higher interest rates or to money market funds. And wealthy clients proved difficult to keep.
JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Citi (C) reported deposit outflows within its wealth management divisions during the second quarter. JPMorgan and Wells Fargo saw declines of 11%, far more than total deposit outflows for the same period.
In mid-August, these four giant banks issued new short-term CD “special offers” in an effort to stay competitive on interest rates. JPMorgan Chase offered up to 5% annual yield for a 6-month CD.
The increase will add pressure on smaller banks, which may not be able to respond, said Ken Tomin, a senior analyst at LendingTree that tracks bank rates.
“They sure are under pressure,” Tommen added.
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