Cash-rich US banks try to cut corporate deposits

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A wave of liquidity flooding bank balance sheets during the pandemic prompted some of America’s largest lenders to take the unusual step of advising corporate clients to withdraw money from deposits.

Banks such as JPMorgan Chase and Citigroup have had conversations with some large corporate clients about placing liquidity in money market funds rather than deposits, according to people familiar with the discussions.

The talks followed a decision by the Federal Reserve in March to end the looser capital rules for banks that were put in place at the start of the pandemic. The regulatory relief had helped lenders cope with a surge in deposits resulting from the US fiscal stimulus and the Fed’s quantitative easing policies.

Usually, deposit growth is a welcome indicator of a healthy economy and allows banks to lend more. But, in the absence of a comparable loan demand, additional deposits can be costly for banks, forcing them to hold more capital.

Jenn Piepszak, CFO of JPMorgan, highlighted the difficulty for U.S. banks during a March earnings call, saying it was “difficult to envision organic loan growth keeping pace with the continued growth. QE ”.

JPMorgan and Citi’s balance sheets are under particular pressure due to the additional leverage ratio requirement imposed on the largest US banks in the wake of the financial crisis.

The Fed’s rule change in April last year allowed the big banks to temporarily exclude holdings of U.S. Treasuries and cash on hand at the central bank from their assets when calculating SLRs.

Now that the regulatory relief has been withdrawn, some large banks are being more picky about the deposits they hold in order to avoid tripping over regulatory restrictions.

It is preferable for banks to incentivize clients to place cash in MMFs, as the instruments are managed by their asset management branches and are not included in the leverage ratio calculations.

Piepszak admitted last month that “refusing deposits” was an “unnatural” move for banks, adding that such measures “cannot be good for the system in the long run”.

But other lenders may soon follow suit.

“Many of the institutions I speak with are actively examining the value of corporate clients. . . which from a global point of view, [are] more or less profitable, ”said Jai Sooklal, co-director of finance for the Americas at consulting firm Oliver Wyman.

Deposits held in America’s three largest banks by assets – JPMorgan, Bank of America and Citi – climbed $ 243 billion in the first three months of the year, on top of a record inflow of $ 1 billion of dollars last year. In 2019, they increased by $ 92 billion.

Leading bankers including Jamie Dimon, chief executive of JPMorgan, and Mark Mason, chief financial officer of Citi, have expressed confidence that the Fed will eventually change the SLR rule, which is under review.

But in the meantime, JPMorgan has started to tinker with its capital structure to help manage the load. In the first quarter of this year, it issued $ 1.5 billion in preferred shares, which increases senior capital and helps improve its debt-to-equity ratio.

Deposits from the time of the pandemic were initially expected to come out of the system as the economy normalized. But bankers are starting to think the unprecedented stimulus could leave them with excess deposits for years.

“Even as consumers pull back to Disney World and businesses call in to build new warehouses and buy new equipment, they just aren’t spending fast enough for what’s happening,” said Gerard Cassidy , analyst. at RBC.

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