For regional banks, merging may be the way to go in the face of a deposit drain that will come sooner rather than later. American Banker reports that the Wall Street titan’s investment bankers are telling their clients, via confidential presentation seen by Bloomberg News, that mid-sized banks could see a “funding problem” by the end of this year. The crunch would come in tandem with the Federal Reserve Bank’s deleveraging efforts tied to the goal of shrinking its balance sheet.
Investors had sold mortgage-backed bonds and treasuries to the Fed, and the cash came into bank accounts. In the meantime, during the emergence from the financial crisis, the Fed through quantitative easing helped create $2.5 trillion in deposits at banks, and now the balance sheet stands at $4.5 trillion.
JPMorgan sees $1.5 trillion coming out of banks as quantitative easing effectively reversed, the Federal Reserve Bank noted. The Fed will simply stop buying new assets, and deposits leaving accounts will not be replenished. For banks that see high turnover between accounts, and the spread that comes from them, that could result in a drag on operations. The impact would be felt by banks with less than $50 billion in assets.
JPMorgan stated that deposit drains will mean fewer loans doled out (which, in turn, bring interest income). Smaller banks already have relatively lesser ability to boost marketing efforts and branch build-outs than do their larger brethren to gather up new business and thus retail deposits. Thus, they may face the pressure to merge even as larger rivals try to lure business with cash incentives and other rewards.