2024 Starts With Deposit Flight From Large Banks, Loan Volumes Shrink; But Trouble Is Brewing For Small Banks

Bank reserves at The Fed rose considerably last week expanding The Fed’s balance sheet by the most since the SVB crisis last March – as usage of The Fed’s BTFP bank-bailout facility pushed to a new record high (amid increasing arbitrage flows).

But, after four straight weeks of inflows, seasonally-adjusted bank deposits saw $23.3BN outflows in the first week of 2024…

Source: Bloomberg

And, on a non-seasonally-adjusted basis, deposits also saw an outflow (-$33.7BN) after five weeks in a row of inflows (NSA)…

Source: Bloomberg

Which means that while money-market funds hit a new record high, bank deposits did pull back a little (despite the drain in RRP filling the liquidity gap)…

Source: Bloomberg

Excluding foreign bank flows, domestic banks saw deposit outflows of just over $40BN (SA and NSA) – the first in 5 weeks…

Source: Bloomberg

Large banks dominated that deposit outflow (Large -$39.9BN, Small -$347MN)…

Source: Bloomberg

On the other side of the ledger, Large bank loan volumes tumbled (-$16.6BN) for the 5th week in row (small bank loan volume rose $4.3BN)…

Source: Bloomberg

The Fed’s reverse repo facility is draining fast (faster each week), getting closer and closer to zero…

Source: Bloomberg

…at which point reserves get yanked, which mean huge deposit flight.

And the embarrassing surge in usage of The Fed’s BTFP for free-money-arbitrage…

Source: Bloomberg

…will make it hard for The Fed to defend leaving the facility open after March when its “temporary” nature is supposed to expire.

“In justifying the generous terms of the original program, the Fed cited the ‘unusual and exigent’ market conditions facing the banking industry following last spring’s deposit runs,” Wrightson ICAP economist Lou Crandall wrote in a note to clients.

“It would be difficult to defend a renewal in today’s more normal environment.”

Which meansy, as we pointed out earlier in the week, “March will be lit”…

March will be lit:

1. Reverse repo ends
2. BTFP expires
3. Fed cuts (allegedly)
4. QT ends (allegedly)

— zerohedge (@zerohedge) January 8, 2024

Because without the help of The Fed’s BTFP, the regional banking crisis is back bigly (red line), and large bank cash needs a home – green line – like picking up a small bank from the FDIC…

Source: Bloomberg

And now you know why The Fed will cut rates in March – no matter what jobs or inflation is doing.