Fed statement on large bank deposit outflows

The Fed released the May 2023 edition of its Financial Stability Report, which includes assessments of the current state of the US financial system.

The report recalled that after November last year, when the above report was released, Silicon Valley Bank (SVB), Signature Bank and First Republic Bank all went bankrupt following major deposit outflows caused by concerns about interest rate mismanagement. and liquidity risks.

The report states that in March, the Fed, along with the Federal Deposit Insurance Corporation (FDIC) and the Treasury Department, took steps to protect bank depositors and support the continued flow of credit to households to avoid spillover effects. broader contagion in the banking system. financial markets have returned to normal and deposit flows have stabilized since March. However, some banks that experienced large deposit outflows continued to experience stress. These developments may put pressure on future credit conditions.” the evaluation was done.

The report noted that Treasury yields fell in March due to increased market volatility, and stock prices held above historical averages.

In the report, which stated that residential property valuations remained high despite weakening activity, the debt vulnerabilities of non-financial corporations and households were reported to have changed little since November last year.

The report noted that the growth in commercial debt remained high relative to gross domestic product, and the household debt ratio remained subdued.

“BANKING SECTOR MAINTAINS ITS STRENGTH”

Noting that excessive reliance on uninsured deposits and concerns about poor risk management have led market participants to reassess the strength of some banks, the report said: “Overall, the banking sector remained resilient with significant loss coverage capacity. expression was used.

The report noted that significant withdrawals of uninsured deposits contributed to the bankruptcies of SVB, Signature Bank and First Republic Bank, leading to further funding shortages for some other banks, particularly those that rely heavily on uninsured deposits. and are exposed to significant interest rate risk. .

Underscoring that policy interventions by the Federal Reserve and other institutions have helped alleviate these pressures, the report noted that money market funds and other cash investment instruments remain vulnerable to “runs” and contribute to the fragility of short-term financing markets.

THE DEBT LIMIT DIFFERENCE IS ALSO AT RISK

While the report also discussed near-term risks to US financial stability, frequently cited risks included persistent inflation and tighter monetary policy, banking sector stress, and geopolitical tensions.

In the report, which also touched on research into significant risks to financial stability, it is noteworthy that almost half of those surveyed said that the US debt ceiling stagnation was among the possible risks.

In the report, it was stated that if the US debt ceiling is not raised on time, the negative consequences of a potential default include financial market disruptions and tighter financial conditions.