(The following statement was released by the rating agency)
NEW YORK, August 21 (Fitch) Wider differences between the yields
on US banks'
interest-bearing deposits and money market funds (MMF) could
outflows after the Fed begins hiking rates, according to Fitch
MMF reforms may also affect deposit flow changes as rates rise.
The tiny rate differences across short-dated rate products are
significant enough to offer a yield advantage of one product
However, as rates eventually rise, Fitch expects money market
funds to be more
reactive to increases in the Fed's short-term policy rates than
observers expect money market funds will attract deposit cash
away from banks
into higher yielding assets after a meaningful (yet difficult to
differential is reached. The magnitude of deposit outflows is
mostly expected to
be driven by institutional money managers that control billions
of dollars of
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US banks currently sit on record levels of deposits, fueled by
Reserve's quantitative easing program. As of July 1, checking
deposits in the US
banking system stood at $1.6 trillion, and rising. Deposits have
risen at nearly
a 15% compounded annual growth rate since the end of 2008,
loan-to-deposit levels well below historical norms.
Institutional share classes
of MMFs (including prime, government and tax-exempt) have stood
just above a
level of about $1.7 trillion for nearly three years, according
to Fed data.
High balances of non-interest bearing deposits are mostly
favorable for banks,
but can be a headache for others, as even non-interest bearing
contribute some expense. Most traditional banks in the US
well positioned for rising interest rates, as excess deposits
can be put to work
in loans, boosting net interest margins.
Even though the Fed's rate increases are not anticipated until
sometime in 2015,
deposit balance forecasting is important now for larger banks
greater than $50 billion) for stress test reporting and
liquidity coverage ratio
(LCR) disclosures that begin starting January 1, 2015.
When benchmark interest rates finally lift, banks will face
about where to set offer yields for interest bearing bank
products. Banks will
have opportunities to hold onto rate sensitive depositors by
yielding products to customers such as certificates of deposit
or by boosting
rates on savings products.
Slow rate increases by the Fed, which Fitch believes is a base
would allow for excess deposits to leak out of the banking
system without any
concern. However, rapid rate increases could draw deposits from
banks at a
faster rate, which Fitch believes would be a less favorable
scenario for banks.
Recent MMF reforms will likely influence this balancing act with
some degree of
outflows from MMFs into banks. New requirements for prime money
including floating NAV, liquidity fees, and potential redemption
gates, may make
money funds a less attractive cash management product for
Consequently, Fitch expects that some investors will gradually
take some assets
out of money funds over the two-year implementation period for
Fitch believes that banks could capture at least some of the
invested in prime MMFs if institutional investors do not feel
compensated for the added risks.
Money market reforms mostly impact the $956 billion of
institutional prime and
municipal money market funds that will no longer enjoy constant
net asset value
pricing. The new rules represent a dramatic overhaul for the
management industry, which has relied upon stable-NAV money
funds and no gating
restrictions for decades. Money funds investing in government
issued or backed
securities face no changes. However, because many bank products
tend to be more
rate competitive with government money market funds, there is a
likelihood that some investors could stick with bank products.
Jaymin Berg, CPA
+1 (212) 908-0368
Greg Fayvilevich, CFA
Funds & Asset Management
+1 (212) 908-9151
Matthew Noll, CFA
Financial Institutions, Fitch Wire
+1 212 908 0652
33 Whitehall Street
New York, NY
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
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