“We’re Heading Into 3rd Phase” Of Crisis – Ex-Fed Pres. Warns As Small Bank Deposits & Loans Surpringly Jump

Following yesterday’s ugly money-market fund (accelerating inflows) and Fed balance sheet (another jump to a record usage of the Fed’s Bank Term Funding Program emergency bailout cash), expectations are that bank deposits continued to leave US commercial banks.

If everything’s so awesome, why are banks using The Fed’s emergency facilities so much?

Source: Bloomberg

And Regional bank shares bounced but stalled at resistance…

And so, according to the latest H8 report from The Fed, on a seasonally-adjusted basis, total US Commercial Bank deposits (including large time deposits) rose by $30 billion during the week ended 5/17 – ending a three week streak of net outflows. 

Source: Bloomberg

Large, Small, and Foreign banks all saw inflows…

On an unadjusted basis, deposits increased $32.9 billion.

Side-by-side, this is the first week in the last six where SA and NSA deposit changes are even close to the same…

On the other side of the ledger, commercial bank lending rose $10.4 billion in the week ended May 17 to a three-week high, according to seasonally adjusted data from the Federal Reserve out Friday.

Small Banks (SA) were the main lenders last week (somehow?!)…

So we are supposed to believe (on a seasonally-adjusted basis) that small banks got some fresh deposits and immediately lent them out to (drum roll please) real estate loans…

…while Large Bank loans unchanged on a seasonally-adjusted basis but down $4 billion on an NSA basis.

On an unadjusted basis overall, loans and leases increased $2.3 billion.

Finally, as we noted yesterday, this is far from over as former Dallas Fed head Robert Kaplan dropped some uncomfortable truth bombs on the US banking system:

Phase one was an asset/liability mismatch at several banks

Phase two began with the stock market deciding to do its own supervisory scrubbing

We are now heading into the third phase.

Bank leadership at small and midsize banks are considering how to shrink their loan books in order to address the mark-to-market loss of capital, as well as to guard against potential deposit instability in the future.

Bank leadership is very aware that the economy is slowing, and that we are likely about to enter a challenging credit environment.

While asset/liability mismatches are relatively easy to spot, assessing the quality of loan portfolios is much more complicated.

CEOs of many small and midsize banks are in a tough position.

They can’t easily raise equity because their stock prices are down.

As a result, they are turning to shrinking their loan books, finding places to pull back on existing loans and future loan commitments.

This is making it much harder for small and midsize businesses to get and keep their bank loans.

It is a quiet phase that won’t make headlines but is nevertheless relentlessly going on beneath the surface.

Read the full interview here…

Free to speak his mind, Kaplan concludes rather ominously, “the recent banking turmoil has highlighted the disparity between too-big-to-fail banks and smaller and midsize banks. I worry that increasing the Fed funds rate from here may create further strains on the deposit base for those smaller banks. I’m concerned that, as the Fed raises rates, it is tightening the vice on small and midsize banks and the small and midsize businesses that rely on those banks for funding.”