Fitch: Bank Liquidity, Credit Ample as Fed Delays Taper
Fitch said that the Federal Reserve’s announcement that it will make no changes in its asset purchase program suggests that U.S. bank liquidity will remain near record levels, as securities held on the Fed’s balance sheet continue to grow. When a tapering of quantitative easing (QE) does eventually begin, Fitch said it expects the impact of reduced bond buying to have little immediate effect on banks’ lending capacity and funding costs.
Five years after the start of QE by the Fed, sustained asset purchases and slow loan growth have created a large deposit cushion for banks that should begin to fall only slowly when monetary stimulus is unwound, Fitch said.
Excess deposits (deposits minus loans) in the U.S. banking system remain at an all-time high. September Fed data indicate that they totaled $2.24 trillion (approximately 14% of GDP). Total bank cash holdings were $2.44 trillion. By comparison, the cash balances figure in September 2008 (before the launch of QE) was $388 billion, Fitch noted.
The gradual start of a wind-down in Fed bond purchases will eventually begin a process in which banks’ cash holdings and loan-to-deposit ratios return to historical norms. A steady reduction in the money supply will lead to a manageable run-off in excess deposits, Fitch added.
While lending capacity will not be eroded by future tapering, borrowers are already feeling the effects of higher interest rates brought about by anticipation of the Fed’s asset purchase pull-back. This has been evident since early summer in the mortgage market as refinancing activity has slowed, according to Fitch.
The ratings firm added that as a result of robust liquidity positions and excess deposits, no near-term changes in banks’ funding costs are likely once tapering begins. Deposit pricing will remain inelastic. However, to the extent that tighter monetary policy ultimately drives short-term rates higher, some banks with higher loan-to-deposit ratios could begin to see cost pressures in funding.