Fitch: QE Tapering No Big Hit to U.S. Bank Liquidity
The much anticipated tapering of Federal Reserve bond purchases will not have a significant negative impact on U.S. banks’ liquidity or on the broad availability of credit in the banking system, according to Fitch Ratings. Historically high cash holdings and excess deposit levels will prevent a gradual change in the money supply from eroding banks’ funding profiles or lending capacity.
The Fed’s four-year QE program has pushed bank excess deposit levels dramatically higher as loan growth has stalled and short-term rates have remained near historic lows since the financial crisis. As of the end of the second quarter, aggregate U.S. bank deposits exceeded loans by $2.15 trillion, Fitch said.
Excess deposits have largely been held on bank balance sheets in the form of cash, creating substantial liquidity buffers as economic growth has remained tepid and growth in loan portfolios has stagnated. Cash balances totaled $2.2 trillion (16% of total commercial bank assets) as of July 31. This compares with $388 billion, or 3.5% of total banking assets, at the end of third-quarter 2008 (prior to the start of QE1), Fitch added.
Fitch said it believes the largest impact of QE tapering and the eventual rise in short-term rates will be felt by high loan-to-deposit banks, as well as banks dependent on online deposits for funding. Still, for most larger institutions, deposit pricing will remain generally inelastic, as excess liquidity will keep a near-term lid on funding costs.
For a detailed analysis of U.S. banks’ current liquidity positions and deposit funding profiles, as well as a review of possible implications of QE tapering, see the Fitch special report “U.S. Banks: Liquidity and Deposit Funding,” dated Aug. 8, 2013 at www.fitchratings.com.