The realization that the Federal Reserve would begin tapering its quantitative easing program threw the markets for a loop in June and July. The extent of fears that rising interest rates would crater the economy was revealed. But according to ratings agency Fitch, tapering the Fed’s purchase of $85 billion in bonds each month won’t lead to a collapse in lending.
Fitch argues in a new report that the amount of excess deposits held by banks as cash, totaling $2.15 trillion as of the end of the second quarter, will provide a source of liquidity with which banks can continue lending. “Cash balances totaled $2.2 trillion (16 percent of total commercial bank assets) as of July 31,” according to Fitch. “This compares with $388 billion, or 3.5 percent of total banking assets, at the end of third-quarter 2008 (prior to the start of QE1).”
Fitch does not address the issue of bank bond portfolios, which will take losses when rates rise, and provisions for losses eat into earnings and possibly capital. Nonetheless, Fitch feels that the ratio of deposits to loans is large enough to support lending.
The Fitch report, “US Banks: Liquidity and Deposit Funding,” dated Aug. 8, 2013, is available on the company’s web site.