Why US Banks are Stashing $3.3 trillion in Cash?

Summary:

·???????? Since the collapse of SVB & Signature Bank, US banks have become cautious on lending due to worsening asset quality

·???????? Collapse of Banks & rating downgrade triggered massive deposit withdrawals and placed renewed focus on lenders' financial health

·???????? Mid-sized banks are worried about upcoming regulations

·???????? This is a logical response to a slowing economy and particularly to a scenario where you're seeing deposit outflows and you need to conserve cash

·???????? The banking sector has remained subdued this year and was hit with a?ratings downgrade

·???????? They're holding a cash pile of $3.3 trillion amid fears of an economic slowdown & Banks need higher cash levels to meet liabilities as customers withdraw

·???????? According to a recent survey nearly 25% of Americans think their money is safer at home than most other places

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US’s Banking Sector

The banking sector has remained subdued this year and was hit with a?ratings downgrade in August. Ratings agency Moody's lowered the credit ratings of 10 small- and mid-sized US banks by one rung, and placed a slate of larger firms under review for potential downgrades, including BNY Mellon, US Bancorp, and State Street. Moody's justified the decision as a more difficult operating environment for banks amid higher interest rates, an uncertain base of deposits, and a murky outlook for the broader economy.

The collapse of Silicon Valley Bank and Signature Bank in March triggered massive deposit withdrawals and placed renewed focus on lenders' financial health. More recently, the sector was hit by ratings downgrades when S&P?last month?cut credit ratings and revised its outlook for multiple U.S. banks, following a similar move by Moody's.

Overall U.S. banks' cash assets were?$3.26 trillion?as of Aug.?23, up?5.4% from the end of 2022.?That was well above typical pre-pandemic?levels,?though down from the weeks immediately following the bank failures in March, Federal Reserve data shows.

Cash assets at small and mid-sized lenders are up 12% compared with the start of the year; at the nation's top 25 banks, cash holdings are up about 2.9%.

Large banks including JPMorgan and Bank of America declined to comment beyond the disclosures, but pointed to their executives' comments?about reasons such as the Fed shrinking its balance sheet, falling deposits and higher short-term rates.

The SVB failure triggered a sudden dash for cash at banks, which within two weeks had bulked up cash assets to?$3.49?trillion, the highest level since April 2022. That has pulled back since then, but is still?almost?twice as high as pre-pandemic.

Banks need higher cash levels to meet liabilities as customers withdraw deposits, and to offset risks such as loan losses as the Federal Reserve keeps interest rates high to cool economic growth and inflation.

A lot of banks are taking steps to reduce risk and strengthen their balance sheets.

Regional banks are shifting more "earning assets," such as those from lending activities, into cash or short-term securities.

As banks see further pressure on deposit costs, and as they hold higher levels of liquidity, we expect loan growth will continue to slow as we get to the end of this year. S&P forecasts 2% loan growth this year, after an almost 9% gain last year.

STRICTER RULES

Mid-sized banks are also worried about upcoming regulations, analysts said.

U.S. regulators?have said?they will likely?impose stricter capital and liquidity requirements?on banks with $100 billion or more in assets.

Since March, regulatory focus?has heightened, prompting banks to focus on key capabilities in liquidity and asset liability management.

Regulators are going to have a shorter fuse" for banks that have any gaps in managing their liquidity and the loans held on their books.

The Fed's aggressive tightening since?March?2022 put a lot of?banks' longer-term?securities under water, creating investor anxiety over the health of?bank balance sheets.

Since then, banks are taking steps to boost liquidity by reducing investments in securities or selling them at a loss. S&P estimated the value of these securities for FDIC-insured banks had more than $550 billion of unrealized losses on their available-for-sale and held-to-maturity securities as of June 30.

Bank of America said in?a July presentation?it sold $93 billion from the available-for-sale segment of the balance sheet in the first two quarters and added the proceeds to cash, which stood at $374 billion at the end of June, its second-quarter earnings data showed. It further showed cash, which was deployed in money markets, was generating better returns than keeping it in low-yielding securities. JPMorgan?has been selling securities for the past year. It has?$420 billion in cash and $990 billion of?what it calls high quality liquidity assets and other unencumbered securities.

It's definitely opportunistic and advantageous to be investing short-term securities.

US’s Economy is under stress

March's banking crisis spooked lenders and saw a significant cutback in credit issuance, which has not yet recovered as banks prefer to hold cash as insurance against a potential US economic downturn later this year. This is a logical response to a slowing economy and particularly to a scenario where you're seeing deposit outflows and you need to conserve cash. U.S. lenders are holding onto large piles of cash as insurance against a slowing economy, continuing deposit outflows and looming tougher liquidity rules that could particularly impact mid-sized banks.

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To date, stress on US banks has been reflected almost exclusively in funding and interest rate risk related to monetary policy tightening, but a worsening in asset quality will likely come. We continue to expect a mild recession in early 2024, and given the funding strains on the US banking sector, there will likely be a tightening of credit conditions and rising loan losses for US banks.

The buildup is another example of a risk-averse approach from a sector still trying to regain its footing after a string of springtime bank failures, one which could result in restrained lending.

This is a logical response to a slowing economy and particularly to a scenario, where you're seeing deposit outflows and you need to conserve cash.

Americans Think Stashing Their Money at Home Is Safer Than Most Bank Accounts

According to a recent survey by GOBankingRates, nearly 25% of Americans think their money is safer at home than most other places and 35% of Americans still think that a savings account is the safest place to stash cash.

Why 24% of Americans Stash Their Cash at Home

There are several reasons Americans prefer to keep their money at home instead of in a financial institution.

Biggest Bank Failures since the Great Recession????????

With rapidly rising interest rates, a few large banks became financially unstable and eventually failed. Silicon Valley Bank, Signature Bank and First Republic Bank all held over $100 billion in total assets and failed in early 2023. The FDIC had to step in to reimburse depositors, even those that were not insured.

The news coverage was dire, leaving many average Americans wondering which bank would be next. This has broken the trust Americans have with the banking system, even though depositors were made whole in the end. Simply the thought of losing access to their might has spooked many. Experts?see this type of economic uncertainty as having a big impact on where people choose to keep their money. Historical financial crises have left lingering fears of bank failures or economic instability. Some people choose to keep cash at home as a precaution against potential disruptions in the banking system.

Some Banks Have High Fees

Banks are some of the most profitable companies in the U.S., and a portion of their income comes from banking fees. While fee income only makes up a small percentage of their overall profit, billions are paid out in banking fees each year. These fees include ATM fees, Monthly maintenance fees, Non-sufficient funds (NSF) fees, foreign transaction fees, Account closure fees, Overdraft fees, Excess transaction fees, Wire transfer fees, Replacement card fees, Inactivity fees & Overdraft protection fees. Larger national banks have higher fees than smaller regional banks, and private banks have higher fees than credit unions. These high fees can scare off consumers, who believe that banks are only out to earn money off their deposits — which is true.

Privacy Concerns: Some citizens simply don’t want the government or any bank keeping an eye on their transactions. With the rise in online scams and fear of surveillance, many don’t trust banks or any online financial institution. Privacy breaches and data hacking incidents have led to concerns about the security of personal financial information held by banks.

Banking Scams are getting worse: Banking scams are losing Americans billions of dollars each year. According to new?data?collected by the FTC, Americans lost over $8 billion due to scams in 2022 alone. This is concerning for some, who might feel vulnerable keeping their money in a bank that can be accessed online.

Cash is tangible: In the digital age, your money is simply numbers on a screen. And while this is perfectly fine for many, some Americans want to be able to hold their money. Cash is tangible: You can store it in your wallet or keep it in a safe place at home. At the end of the day, cash is real to many citizens. And you can quickly access funds without any restrictions. A belief that physical cash provides immediate access to funds, unlike potential delays or restrictions that could be imposed by a bank, drives some to keep cash on hand for emergencies.

The Safest Places to keep your Money

While 24% of Americans prefer to keep their cash at home, this might actually be one of the riskier places to keep it. Cash can be stolen or lost at home, and there are no protections in place to reimburse you if you lose your money.

FDIC-Insured Bank Accounts — Checking or Savings: FDIC protects deposits in any FDIC-insured bank in the U.S. Deposits are insured up to $250,000 per depositor, per account type. This means if you have a checking account and a savings account, you are insured for up to $250,000 in each. And married couples in a joint account are insured up to $500,000 in deposits. While banks collapsing may seem worrisome, the FDIC has reimbursed every insured depositor in a bank collapse since its inception 90 years ago. And on occasion, it has even stepped in and made whole depositors that exceeded the deposit insurance limits.

U.S. Treasuries: U.S. Treasuries are government-backed securities that include bills, bonds and notes that you can buy directly from the U.S. government. The U.S. Treasury market is often seen as one of the safest places in the world to park your cash, and you can earn interest, too. While historically long-term Treasuries pay out higher rates, with today’s rising-rate environment, investors can buy short-term treasuries —under one year to maturity — and earn up to 5% interest or more. This makes it not only a safe investment, but a decent return, as well. Just note that selling your Treasury before maturity might erase any gains you may have had.

Certificates of Deposit (CDs): Certificates of Deposit (CDs) are a type of savings account that pays you interest on deposits over a specific term. CDs are FDIC-insured, just like a regular bank account, and are among the safest ways to store your cash. But they aren’t as liquid as cash, as you might pay a penalty to access the funds early.