Banks Borrow Unsecured Cash at Record Clip While Deposits Flee Deposits at US lenders fell in 2 consecutive quarters last year for the 1st Time in Over a Decade

From [HERE] Banks were chasing away deposits during the depths of the pandemic. Now, some are paying higher rates to shore up cash.

Borrowing in the federal-funds market hit $120 billion on Jan. 27, the highest one-day total in Federal Reserve data going back to 2016. Activity in fed funds—used by banks and government-backed lenders to exchange cash reserves parked at the Fed—surged throughout the past year when the central bank raised interest rates at the fastest pace in decades.

Some banks are scrambling to borrow, looking to improve their liquidity and satisfy regulatory requirements while customers pull cash from savings accounts in search of higher-yielding products.

The typical fed-funds trade involves a Federal Home Loan Bank, or FHLB, lending cash overnight to a commercial bank. The government-sponsored entities, designed to support mortgage lending during the Great Depression, can’t earn interest by leaving funds at the Fed as banks can, so they lend their excess cash to banks without requiring securities to back the loan.

The identities of the banks involved aren’t public. Traditionally, most borrowers have been foreign banks looking to make a few extra bucks by borrowing cheaply in fed funds, then leaving that cash at the Fed to earn more interest. Now, more U.S. banks are dipping in, according to Bank of America, likely because such borrowing is looked upon favorably by regulators. 

Aggressive bidding by a subset of commercial banks has jacked up the cost of the priciest fed-funds transactions, New York Fed data show. The highest borrowing rates are 0.15 percentage point above the Fed’s target range—now between 4.5% and 4.75%—and more than 0.3 point from the median, or the effective fed-funds rate. Essentially all trades were priced below the target range until October, before which no measurable portion had breached it since March 2020. [MORE]