Banking sector warning: Barclays sees 'second wave' of deposit outflows coming
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(Kitco News) The banking crisis is likely far from over, as Barclays warned that a "second wave" of deposit outflows is coming.
"We think the first wave of outflows may be nearly over. .. But the recent tumult regarding deposit safety may have awakened 'sleepy' depositors and started what we believe will be a second wave of deposit departures, with balances moving into money market funds."
After the failure of Silicon Valley Bank (SVB) and Signature Bank, U.S. regulators worked quickly to backstop the banking system, which has calmed market fears in the short term.
"While market psychology is still fragile, our sense is that deposit outflows from small to large banks will fade as depositors recognize they can access and transfer their balances without any hitches," Barclays strategist Joseph Abate said in a note.
However, a second wave of outflows is likely to be triggered by "sleepy" depositors moving their savings from banks to money-market funds for better and safer returns, Abate wrote.
"It is too hard to shift balances or to establish a new relationship with another institution unless there is a large, convincing yield pickup. But some of it could reflect the fact that after 15 years of near-zero rates, depositors are not in the habit of paying much attention to the yield on their cash balances," Abate said.
Now, there is a higher yield in a money market fund competing for the depositors' savings.
Abate pointed out that money-fund balances jumped by around 20% during the last four tightening cycles. Considering this dynamic, he concluded that balances could rise by $1 trillion, adding that the balance increase is currently around $600 billion. And almost half of that has happened since March 10.
"We think the inattentiveness threshold has been reached, and the second wave of deposit outflows has begun, and we expect banks to compete more aggressively for deposits," Abate noted.