Bank Deposits Show No Sign of Rebound, Rising Credit Rejection Rates Could Crunch Profits

US bank deposits dipped to their lowest level since May in the most recent week of data, signaling that a meaningful rebound in banks’ cheapest source of funding might still be far off. Reliance on brokered deposits and government-backed funding from the Bank Term Funding Program (BTFP) continue to grind higher with rates elevated and unrealized losses having re-expanded.

Though lending dynamics have improved with a steepening of the yield curve, survey data shows that banks appear to be tightening credit standards and raising rejection rates to levels unseen since 2018. Banks feasted on record issuance of new credit cards early in the year, but growth in consumer credit has slowed significantly over the past several months, potentially impacting net income going forward.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE)

Deposits held across all US commercial banks dipped to a nearly four-month low in the final week of August. The outflow of more than -$70.1 billion during that period was the largest since July. Since peaking in April 2022, the US banking sector saw total deposits at all commercial banks decline by as much as -$981.0 billion. Since that trough, only about 3.7% of withdrawn deposits have returned to the banking system.

The value of the funds on loan from Fed’s Bank Term Funding Program jumped to a record high of more than $107.9 billion in the week to September 6, up by almost 7.7% over the past three months. The BTFP allows banks to take advances from the Federal Reserve as a loan for up to a year by pledging their underperforming Treasuries, mortgage-backed bonds and other discounted debt as collateral at par value. Not only is the liquidity significantly more valuable than the collateral backing it, but also very expensive for banks, with the most recent effective rate of that debt coming in at more than 5.5%. When the BTFP was established, the US Treasury Department pledged to backstop the program with $25 billion, but its current level of lending is doling out more than 4x that amount.

As MRP has previously noted, the rise in BTFP borrowing has helped to partially offset some of the decline that was witnessed in banks’ reliance on 11 government-sponsored wholesale regional lenders known collectively as the Federal Home Loan Banks (FHLB). The Financial Times writes that US banks and credit unions had $880 billion in outstanding loans at the end of June from the entities, down roughly…