US banks report USD 370 billion decline in deposits in second quarter

US banks report USD 370 billion decline in deposits in second quarter

For the first time since 2018, deposits at American banks have reportedly dropped by USD 370 billion in the second quarter of 2022. According to the Federal Deposit Insurance Corp., deposits decreased from USD 19.932 trillion in March to USD 19.563 trillion as of June 30.

However, banks don't have an issue with the outflow during the quarter as they have more deposits than they need. Deposits in the banking sector typically remain quite steady, but due to COVID-19 situation, they increased by USD 5 trillion over the past two years.

Currently, a series of rate fluctuations by the Federal Reserve are removing some of that money from the system, in part by causing a shift in consumer demand from loans to bonds.

When the Federal Reserve started raising its benchmark rate this year, banks anticipated and wanted some clients to move their money to locations giving higher interest rates, such as government bonds.

Many analysts mocked the notion that bank deposits may fall this year as late as April. However, the Federal Reserve has increased rates more quickly than anticipated, and this has had a more noticeable impact on deposits.

Additionally, the Reserve’s efforts to tighten monetary policy and moderate inflation will be analyzed considering the deposit withdrawals in the context of a banking system that is overflowing with liquidity.

Whereas the number of reserves commercial banks maintain at the Federal Reserve has nearly tripled due to stimulus programs implemented during the pandemic. As part of its efforts to remove money from the system, the Fed aims to lower those reserves, but only to a certain extent that will maintain liquid and functional markets.

For those unknown, banks will retain fewer reserves with the Fed because of the reduction in consumer deposits. The Fed will be affected by how quickly that occurs, particularly when it finishes tightening and measures the size of its balance sheet in the long run.


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