BofA analysts Priya Misra and Brian Smedley have issued a warning in a
recent note to clients about another "cliff" facing markets at the end
of the year: the "$1.6 trillion deposit cliff" the U.S. banking system
faces when special FDIC insurance provisions expire on December 31,
2012.
When that happens, according to Misra and Smedley, it could "cause dislocations within the banking system" and send short-term interest rates on Treasuries negative while simultaneously increasing the funding costs banks face.
Some background: the FDIC currently offers unlimited insurance on noninterest-bearing deposits at banks it services.
The unlimited insurance is a policy measure taken in response to the 2008 financial crisis, when banks were having trouble securing funding. Then, in 2010, Dodd-Frank legislation extended the unlimited insurance provisions through the end of 2012.
It's been a boon for the banking system, which has been able to count on deposit growth as a key source of funding while it deleverages–in lieu of more expensive funding sources like interbank lending (indeed, Misra and Smedley point out that all sorts of other funding sources like long-term debt, fed funds, and repo instruments, among others, have decreased by a whopping $1.28 trillion since 2008).
When that happens, according to Misra and Smedley, it could "cause dislocations within the banking system" and send short-term interest rates on Treasuries negative while simultaneously increasing the funding costs banks face.
Some background: the FDIC currently offers unlimited insurance on noninterest-bearing deposits at banks it services.
The unlimited insurance is a policy measure taken in response to the 2008 financial crisis, when banks were having trouble securing funding. Then, in 2010, Dodd-Frank legislation extended the unlimited insurance provisions through the end of 2012.
It's been a boon for the banking system, which has been able to count on deposit growth as a key source of funding while it deleverages–in lieu of more expensive funding sources like interbank lending (indeed, Misra and Smedley point out that all sorts of other funding sources like long-term debt, fed funds, and repo instruments, among others, have decreased by a whopping $1.28 trillion since 2008).
No comments:
Post a Comment