Recent data shows that bank deposits in money market funds continue to surge in the United States, reaching a historical high of $5.34 trillion as of May 17th. Concurrently, the Federal Reserve's Bank Term Funding Program (BTFP) has witnessed a significant increase in loan volume, reaching $87 billion, indicating that the crisis may still persist.
According to the Investment Company Institute (ICI), money market funds have been expanding their size, continuing the trend from the previous week. As of the week ending May 17th, approximately $13.6 billion flowed into US money market funds, pushing their total size to a historical high of $5.34 trillion. Over the past three months, money market funds have grown by over $520 billion.
The continuous inflow of funds into money market funds can be attributed to two factors. Firstly, the market interest rates have been increasing due to the Federal Reserve's ongoing rate hikes, which enhances the advantage of depositing funds. Secondly, the crisis in the banking sector has led to "small bank deposit risk," prompting funds to shift towards safer money market funds. In addition to investing in Treasury securities, money market funds have become significant participants in the Fed's $2.25 trillion overnight reverse repurchase operations (ON RRP), diverting substantial funds away from banks and into the Fed, causing increased pressure on banks.
As the US debt ceiling deadline approaches, the yields on short-term Treasury bills continue to decline (as these bills are generally considered to have no default risk), leading money market funds to favor shifting funds from Treasury bills to the RRP tool. This could further reduce bank reserve balances and result in continued liquidity challenges.
The Federal Reserve's support for banks is still ongoing. As of the week ending May 18th, outstanding loans from the Fed amounted to $96.1 billion, higher than the previous week's $92.4 billion. Notably, the loans provided through the BTFP program to address the crisis at Silicon Valley Bank surged to $87 billion, while loans through the discount window decreased to $9 billion. This indicates a growing reliance on the BTFP program. The recent rebound in US bank stocks suggests that the market believes the banking crisis is receding.
US bank deposits continue to flow into money market funds, reaching a historic high of $5.34 trillion. The combination of rising market interest rates and concerns over small bank deposit risks has fueled this trend. As the US debt ceiling deadline looms closer, the shift from Treasury bills to the Fed's RRP tool may further strain bank reserve balances and liquidity. The ongoing support from the Federal Reserve, particularly through the BTFP program, highlights the persistence of the crisis in the banking sector. Despite some signs of recovery in the US bank stocks, market participants remain cautious about the industry's stability.
#USBanking #MoneyMarketFunds #FederalReserve #BTFP #BankingCrisis #LiquidityChallenges
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