The credit markets breathed a sigh of relief on September 18 as an anticipated back-up in rates and rush to shorter durations was postponed due to the FOMC’s decision not to begin tapering QE. But according to Fitch, there is little to worry about even when the Fed takes its foot off the monetary pedal.
According to the rating company’s recent market review (“U.S. Banks: Liquidity and Deposit Funding”), excess deposits will take up a lot of the slack. Deposits minus loans at US banks are at an all-time high of $2.24 trillion, representing about 14 percent of GDP. Cash balances are $2.44 trillion. Fitch notes that cash before the launch of QE totaled only $388 billion.
Fitch noted: “While lending capacity will not be eroded by future tapering, borrowers are already feeling the effects of higher interest rates brought about by anticipation of the Fed’s asset purchase pull-back.”
But the combination of massive amounts of cash and excess deposits means there will be little change in bank borrowing costs once tapering begins, according to Fitch. As overall monetary policy tightens – something not anticipated until in 2015 to 2016, according to the FOMC’s September 18 statement – those banks with high loan-to-deposit ratios will find their costs of funding risisng.
That means, well before then, it may make sense for treasurers to consider the loan to deposit ratio strategy of their main liquidity providers, at least when they next shake up their bank groups.