Large US Banks Juggle Corporate Deposits and Capital Requirements
(4 May 2021 – United States) A wave of cash flooding bank balance sheets during the pandemic has prompted some of the largest US lenders to take the unusual step of advising corporate clients to move money out of deposits.
Banks including JPMorgan Chase and Citigroup have held conversations with some large corporate clients about putting cash into money market funds rather than in deposits, according to the FT.
The discussions followed a Federal Reserve decision in March to end looser capital rules for banks that were put in place early in the pandemic. The regulatory relief had helped lenders to cope with a surge in deposits that resulted from US fiscal stimulus and the Fed’s quantitative easing policies.
An influx of deposits with relatively weak loan demand depresses bank profits. It also increases the size of their balance sheet, requiring more capital and reducing banks’ returns on equity.
Jenn Piepszak, JPMorgan’s chief financial officer, pointed to the difficulty for US banks during an earnings call in March, saying it was “hard to envision that organic loan growth could keep pace with further QE”.
The balance sheets of JPMorgan and Citi are under particular pressure owing to the supplementary leverage ratio requirement that was imposed on the largest US banks following the financial crisis.
The Fed rule change in April last year had allowed the big banks to temporarily exclude holdings of US Treasuries and cash kept in reserve at the central bank from their assets when calculating SLRs.
Now that the regulatory relief has been withdrawn, some big banks are being pickier about the deposits they hold in an effort to avoid tripping regulatory restraints.
Prodding clients to put cash into money market funds is preferable for the banks because the instruments are managed through their asset management arms and are not included in leverage ratio calculations.
Piepszak acknowledged last month that “turning away deposits” was an “unnatural” action for banks, adding that such measures “cannot be good for the system in the long run”.
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