J.P. Morgan is offering regional banks some interesting advice: Partner Up as U.S. Deposit Drain Looms.
JPMorgan Chase & Co. has some advice for regional banks: A deposit drain is coming, so merge while you can.
The company’s investment bankers are warning depository clients that they may begin feeling the crunch in December, thanks to a byproduct of how the U.S. Federal Reserve propped up the economy after the financial crisis, according to a copy of a confidential presentation obtained by Bloomberg News and confirmed by a JPMorgan spokesman.
JPMorgan argues that some midsize U.S. banks — those with $50 billion in assets or less — could face a funding problem in coming years as the Fed goes about shrinking its massive balance sheet, according to the 19-page report the New York-based bank has begun sharing with clients.
The Fed is currently holding about $4.5 trillion of securities. The way it will get rid of them is by letting them mature and not buying new ones.
Deposit ‘Destroyed’
JPMorgan’s presentation, titled “Core Deposits Strike Back” illustrates how this process will sap bank deposits using the example of a couple who pays off a mortgage that was bundled with other mortgages and sold to the Fed. Right now, when that couple takes that money out of their bank account for that payment, the Fed uses that cash to buy another mortgage bond, recycling it back into the banking system.
A “deposit is destroyed” if the “Fed does not reinvest,” the presentation states.
JPMorgan estimates that a quantitative easing-related deposit-drain could result in loan growth lagging deposit growth by $200 billion to $300 billion a year.Midsize banks will have an especially hard time growing retail deposits by ramping up advertising and investing in branches, according to JPMorgan’s presentation. That’s because they lack the marketing muscle of mega banks such as JPMorgan itself, as well as Wells Fargo & Co., Citigroup Inc., and Bank of America Corp. JPMorgan, like some other banks, offers depositors cash incentives for opening new checking and savings accounts with five-figure balances.
About 42 percent, or $1.6 trillion, of the new deposits that U.S. banks have amassed since late 2009 have gone to lenders with at least $1 trillion in assets, according to data JPMorgan compiled from regulatory filings and SNL Financial.
“Large banks are making sizable investments in brand, customer acquisition and technology leading to market share gains,” according to the report.
Self-Serving Advice?
Somehow this smacks of self-serving advice. Merge with JPMorgan while you can.
By the way, it seems the banks had the playbook before the report.
Nearly every major regional bank missed its lending estimate. As discussed on April 29, a Regional Lender Loan Crash is underway.
Mike “Mish” Shedlock.
This is exactly the reason the Fed will never shrink it’s balance sheet. They checked in the monetary roach motel. They haven’t raised interest rates past 1% and the wheels are already starting to come off. There is a reason they act in this order, raise interest rate and talk about the balance sheet. It would have been more natural to unwind the balance sheet first and then raise interest rates. It’s the reverse order of their actions. But they know, unwinding the balance sheet will cause debt deflation and interest rates will rise as a result of greater supply of bonds.
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Fully agree. It will never happen.
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“But they know, unwinding the balance sheet will cause debt deflation and interest rates will rise as a result of greater supply of bonds.”
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Rising rates will put a damper on economy —-> low growth / recession.
Shrinking balance sheet more likely lead to stock market falling … which will herd money to safe haven — treasuries.
Corporate and other junk debt? Good luck.
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I am not so sure treasuries will be perceived as a safe haven as the lender of last resort is selling. We will never know, because it will never happen.
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Who said anything about selling?
Even the most optimistic federal reserve official talks of running off (allowing securities to mature) the balance sheet as means of shrinkage.
But I agree with you that balance sheet is not going to shrink anytime soon … the better bet is resumption of QE.
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Yes, it is disingenuous. First, deposits were not in dire straights before the Fed began growing its balance sheet to offset the negative impact of The Great Recession (4Q07-1Q09) So, in a perfect world, this should take things back to “Normal”, whatever that is these days.
Once George W. Bush gave Billions of Billions of dollars to the “Too Big to Fails”, on TV in October of 2008, that signaled that the largest “Banks” had an implicit guaranty by the Treasury, which caused deposits–at the Too Bigs–to grow even more concentrated. So once again, the reaction to a corrective measure just made it even worse.
I don’t know if its true, but Trump has suggested breaking the Big Banks up–perhaps not all the way back to Glass-Steagil, but, perhaps mixing and matching the various component parts. I’ll hold my breath on that one!
Keep in mind that, prior to 30 years ago, or so, the securities firms were partnerships, and the partners’ own money was at risk. Once they incorporated, however, the funds at risk belonged to the shareholders. That way, the partners were protected, but they still received egregious salary and bonuses.
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“Right now, when that couple takes that money out of their bank account for that payment, the Fed uses that cash to buy another mortgage bond, recycling it back into the banking system.”
Is it likely that Treasury will opt to issue ultra-long bonds of 50 or 100 years maturity to recycle this cash…
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Gee, the problem with US banking is that thousands of local and regional banks that were close, knew, and were directly “invested” in the local customer were intermediated by consolidation of the US banking sector to a few Too-Big-to-Fail (Too-Big-to-Jail) behemoths as well as a switch from a deposit-and-loan model to one of origination-and-securitisation (further intermediating the system). We see the results.
So, doing more of the same is going to make things better? Excuse me, but some expert told me I need to spend more time banging my head against the wall, and who am I to not follow such sage advice?
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The banks had a get out of jail free card named Barack Obama, and it cost less than half a million to buy. I’m sure Eric Holder is cashing in too, but in the shadows, like a good little corporate shill.
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They’ve had a get out of jail free card since long before Obama. The most recent pre-O example being bailouts under Bush and Paulson.
O was an idiot pushover like the rest of his ilk. But not because he irrelevantly had a D after his name rather than an R.
Pretending bankster fellating and falling for pseudo science and childish scare tactics is some sort of partisan issue, is a prime the reason the banksters do have a get out of jail free card in the first place.
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All that technology just going to waste if the regional banks don’t merge with the big fish. Ah, what technology leads to more bank customers? You mean all those automated voice ques from hell or the internet application that your programmers never adequately? Or is it the 24/7 automated computer queries and conflict resolutions that raise one’s blood pressure? Can’t be humans on the line, that’s not technology at its finest.
Oh, it must the the too big to care bank brand. Yeah, that;s the ticket. We have patented and trademarks methods to rip you off. Of course, the public flocks to us with their deposits because we offer poor service unlike you regional banks.
I’m sorry, didn’t any of the marketing pukes ever take a course in reality?
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A 15% corporate tax rate could lure a $Trillion foreign corporate investment into the USA. A rational man would not invest in the Muslim EU. Repatriation of $2Trillion US corporate profits will also swell the US money supply. The Fed has a one time $3 Trillion opportunity to sell its bond stash.
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What needs to be understood is that assets abroad can be used domestically with minimal execution costs under existing tax rules. For example debt raised domestically can be defeased from cash flows on assets owned abroad via a swap, voila cash is available domestically…..so the whole idea that assets are stranded abroad to the detriment of the domestic economy is silly.
The real issue is that essentially free money has prevented deserving companies from failing, all future cash flows are priced stupidly high. So there are very few truly positive NPV projects. Businesses have few incentives to invest. Until the FED steps back and lets the markets clear the malaise will continue. Unfortunately, I believe that there is still sufficient system slack to permit the malaise to continue for years and years……hopefully there is sufficient truly American spirit left to change this soon.
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The offshore entities can already invest in the USA if they want. In fact, many, if not most of them already do. For instance, Braeburn Capital manages the cash owned by Apple’s offshore entities, and it heavily invests in the United States. Just because “title” to the “offshore” cash is with overseas subsidiaries, does not mean “the money” is not in the United States economy.
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Time to nationalize our criminal cartels or bust up the monopolies before they inflict even more damage on the real economy, something we should have done back in 2008!
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Nationalize the banks? Sheeeh.
Time to remove the Fed
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Nationalizing is exactly the worst possible option. It’s nothing more than a perpetual bailout.
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Bankers are just seeking yet another excuse to rip off their elders via the printing press. Confiscate stuff from the people, and put the loot in banker pockets.
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Trump has suggested breaking up the big banks. He has surrounded himself with Goldman Sachs men.
Goldman Sachs is not a player in the retail business. They only started retail accounts in 2016. This means that it would work to their favour to break up the big retail operations, like JP Morgan, for example. They have an incentive.
Gary Cohn has recently come out in support of breaking up the retail giants too. A breakup and re-regulation of retail is a strong possibility – but somewhat down the priority list.
Nobody really knows what will happen to deposits. It’s all about confidence, and a bank subjected to a forced breakup could see a loss of deposits too.
No doubt JPM is aware of this and will be publishing a lot of crazy stuff in the coming months.
There is no humanity amongst these City bankers. The collapse of Bear-Stearns in 2007 leads one to conclude that they are all sharks waiting for another piece of meat to be tossed into the water, and in the absence of that, will start eating each other.
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Trump is a lame duck and 2018 will make it worse. Trying to read his scattered tea leaves is a huge waste of time.
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“Trump is a lame duck and 2018 will make it worse.”
A recent poll showed that Trump would win even more bigly, if the election were held today.
The Democratic Party is a lame duck, which the American people find to be out of touch with us.
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“A breakup and re-regulation of retail is a strong possibility – but somewhat down the priority list.”
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Shock Doctrine
No Way No How that occurs absent another crisis. We’ll get one.
I’d box the exacta of BofA and Citi for candidates to get broken up.
I think JPM has too much “pull” … and will survive.
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Gee, sounds like another well engineered ‘unintended consequence’.
Maybe they hand out annual awards for these at some closed door gala during Davos or Bilderberg.
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The Fed increased its balance sheet by “printing money”. It can only decrease it by “unprinting money”. The Fed simply takes money received from maturing assets and places it back in its vault or sends it to be destroyed. This has the effect of reducing the money in circulation as JP Morgan notes, causing a liquidity problem.
The solution is simple. Reduce the interest paid on the $2.2 trillion (as of March 2017) of excess reserves, making it negative if necessary to get the big banks to move liquidity into the economy.
I took a quick look into FRED and discovered that the Fed has quietly (I never heard a peep about this) raised the interest paid on excess reserves to 0.75% from 0.5%, Dec. 13, 2016, and then again to $1.00% on Mar. 16 of this year. What is this about? It suggests to me that the Fed is deliberately reducing liquidity in the economy to create a recession.
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The solution is simple. Reduce the interest paid on the $2.2 trillion (as of March 2017) of excess reserves, making it negative if necessary to get the big banks to move liquidity into the economy.
Negative interest on reserves will not and more important cannot force or get banks to lend. Excess reserves are a function of the Fed.
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The Fed has to move the interest rate paid on excess reserves in lockstep with their increases to the Fed Funds target rate. Excess Reserves are available as systemic liquidity – they can be lent among the banks – so if the Fed wants to “tighten”, they have to increase the interest paid on excess reserves or the Fed Funds market (with a higher cost of funds) would effectively cease to exist.
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Fascinating! I can’t seem to insert the FRED graph but they are in lockstep. I guess it is about 10 years since I explored the operations of the New York Fed (FRBNY). At that time inter-bank lending was controlled by the Open Market Trading Desks through repos. A news release of Feb. 12, 2016 explains the change in operations used to control interest rates and lending: FEDS Notes: The Federal Reserve’s New Approach to Raising Interest Rates (https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/the-federal-reserves-new-approach-to-raising-interest-rates-20160212.html). It’s quite readable and explains why the rates are in lockstep.
The argument for systemic liquidity I don’t follow. As the Fed reduces the size of its balance sheet in terms of assets held, it must reduce the liability side by the same amount. There are only two items of consequence under liabilities, currency in circulation and excess reserves. To reduce currency must cause interest rates to rise in response to reduced liquidity in the economy, slowing economic growth.
It would seem to me that the preferred approach would be to sell the assets back to the banks with the excess reserves reducing both sides of the balance sheet without affecting interest rates or economic activity. The only problem I see with this approack is the Fed might suffer a net loss on the round trip, destroying its capital base.
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Could it also be a reaction to reduction in cross border finance opportunities as globalisation retreats?
Big global names need local retail as international takes a hit?
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Exactly. This is nothing more than self serving scaremongering by JPM.
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yup – JPM talking up it’s book in a most shrewd way.
playing serious hardball
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“Somehow this smacks of self-serving advice. Merge with JPMorgan while you can.”
Bingo. QE was a total failure. Instead of using the money to invest in the real economy, it was used to prop up bank balance sheets and engineer stock buy backs. Now JPM needs the deposits of those mid-sized banks to prop up its balance sheets, so naturally that’s a good thing. It’s JPM that’s going to be hurt by the end of QE. We need more regional banks, and less welfare for the too big to fail.
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“Midsize banks will have an especially hard time growing retail deposits by ramping up advertising and investing in branches, according to JPMorgan’s presentation. That’s because they lack the marketing muscle of mega banks such as JPMorgan itself…”
I get ads from them in the mail all the time. I just throw them in the trash. JP Morgan is a felon bank.
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“JPMorgan Chase & Co. has some advice for regional banks: A deposit drain is coming, so merge while you can.”
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Of course, what needs to happen is the exact opposite.
TBTFs need to be broken up
Bring back the Kaufman Amendment!
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“Nearly every major regional bank missed its lending estimate.”
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Because they deal with the real economy. Business loans and commercial real estate are their bread and butter.
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There are more than $2 TRILLION in excess reserves still parked at the Fed.
With that being the case, banks have virtually no need for any new deposits – especially retail deposits.
After the Fed has shrunk its balance sheet by HALF, then we can begin talking about a “deposit shortage” – although I doubt an of us will still be alive by then.
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Most banks right now are happy with a deposit drain. It’s not like they’re telling customers “We’d love to lend you more money but we’re losing deposits so we don’t have any money to lend you.”
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You’ve got it backwards. Most people do – even here.
Banks don’t need deposits to “lend out”, since new deposits are instantly created when loans are made. (Fractional Reserve Lending).
And furthermore, with $2 TRILLION+ in excess reserves sitting idle at the Fed, the only constraints on banks’ ability to lend are loan demand and the availability of creditworthy borrowers.
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I don’t have it backwards at all, I have it just like you have it.
It’s JPMC that has it backwards. And they can’ t be that stupid. They’re obviously floating a trial balloon but I don’t think smaller banks are that stupid to buy into it. Makes you wonder who their audience is with this idiocy. Regulators, maybe?
I’d bet they’re eyeing some Canadian banks.
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Those reserves disappear with higher interest rates. They will be needed to fill in the capital holes that exist in the TBTFs.
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In S&L rising rates and tepid loan demand meant that any bank with more deposits than loans went under. Seems banks might want to Chase (pun intended) depositors away, which is exactly what that bank did a few months ago, in a move to impose limits on LARGE despositors. Loan demand in this recession like recovery is never going to make up for the interest the banks would have to pay to promote the Feds policy of normalization. Bottom line is a flat yield curve, which the government monetization machine should like. Seems like they always get their way.
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The “moral hazard” in progress. We are sailing ever deeper into uncharted waters, the Fed at the helm.
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>>A “deposit is destroyed” if the “Fed does not reinvest,” the presentation states.
What is removed (*) is RESERVES, not deposits. Both Bloomberg and JP Morgan are mis-characterizing what is going on when FRB stops reinvesting maturing QE bond assets.
The problem with dwindling reserves is something different. As Bam_Man indicated above, there are maybe about 2T more reserves overall at the moment than what is required to maintain the overall required fractional reserve ratio relative to the current overall amount of debt. BUT I think many banks seen individually do NOT have excess reserves, because the reserves gained by QE (QE=parking crappy bonds at the FRB and getting these bonds credited as reserves) have already been assigned to other banks as payment for interbank debt, much of it due to loan losses after 2007.
So: These weaker banks need more deposits so that they can buy some sort of acceptable debt (Treasury Bonds) that FRB will accept as reserves. I’ll say it again: Reverse QE does not “destroy deposits”, but it creates a need for more deposits with which to buy reserve-worthy assets. Especially for weaker banks, that is banks that do NOT have excess reserves.
All of this appears to be why even big banks, including Citi, JPM, HSBC and Goldman Sachs all are sending out adverts offering $500 for opening 100k bank accounts with them, They want to compete with the smaller banks for deposits, and they plan to maintain and use their excess reserves as a weapon to take over smaller banks.
(*)”destroyed” is for those who are prone to hyperbole
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Ding, Ding, Ding – you are correct.
However, Excess Reserves represent systemic liquidity, and can be “lent” to banks who did not participate in the QE process. This is the primary reason why the Fed Funds market is all but dead today.
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The balance sheet of the Fed will hit 10 trillion before it sees a number under 4 trillion.
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and money velocity will go negative
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