KBRA Analytics Releases The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show
KBRA Analytics releases this month's edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show.
This month's newsletter takes a detailed look at the Federal Reserve's balance sheet composition as it begins to shrink under quantitative tightening. The piece also discusses why bank treasurers have been pleasantly surprised by deposit betas, which have trended below where they were expected to be by now. This is especially notable given that the Fed has raised rates far more rapidly than in the last tightening cycle from December 2015 to December 2018. Bank treasurers are also generally optimistic that deposit levels will remain stable through the end of the year. Some of the reasons for this good fortune include the fact that commercial and consumer depositors continue to prefer holding deposit balances higher than before COVID, the shift in the mix of deposits to noninterest bearing, and the sheer excess liquidity in the system. The newsletter also contrasts the cooling of the residential mortgage market with the annual growth rate for commercial bank loans, which soared this year to the highest rate in 20 years. Some bank treasurers are even preparing to tap their Federal Home Loan Banks (FHLB) advance lines to support loan growth, which they expect to hold solid through year-end.
Shifting to bank treasury strategy, the newsletter discusses what bank treasurers think about the inversion of the 2s-10s Treasury curve by more than 20 basis points, the most it has been inverted in 20 years, as well as the potential for it to invert further. While some have been putting on receiver swaps to protect against a recession scenario where the Fed cuts rates next year or in 2024, many simply prefer to maintain their dry powder and wait for a better entry point to buy bonds. Indeed, data shows that bank portfolios of Agency mortgage-backed securities (MBS) edged down in Q2 2022 as bond portfolios amortized.
This month's Bank Treasury Chart Deck begins by highlights how the U.S. dollar and the euro reached parity this month, examining its connection to the Fed's hawkish turn. The chart deck goes on to detail the evolution of the Fed's balance sheet since the first quantitative easing (QE) that it launched in December 2008. The piece then compares M1 (monetary supply inflation) and the monetary base, showing how these two measures of money supply diverged. Shifting to the consumer, the chart deck shows how consumers maintained higher balances in deposits accounts than they had pre-pandemic. The concluding slides present survey data indicating that banks remain on relatively easy credit terms with the consumer, though other data shows that consumer credit growth has begun to slow in recent months.
On Bank Talk: The After-Show, Ethan walks Van through the mechanics of the Fed's balance sheet, connecting the dots between its System Open Market Account (SOMA) portfolio and gyrations in the Treasury General Account (TGA), the balance of the Fed's reverse repo facility (RRP), and reserves. Ethan argues that the markets might be overestimating how much the Fed can shrink its balance sheet. After explaining how the supply of reserves is tied to bank demand for an overnight investment and to meet liquidity requirements, Ethan and Van launch into a discussion on the economics of the supply demand curve for Fed Funds. They also discuss the possibility that the RRP could lead to reduced demand for reserves, which may reduce the level of reserves the Fed would need to maintain reserve balances at an ample level.
Click below to view the reports:
- The Bank Treasury Newsletter Chart Deck: July 2022
- Bank Talk: The After-Show: July 2022
- The Bank Treasury Newsletter: July 2022
About KBRA Analytics
KBRA Analytics, LLC (KBRA Analytics) is our premier product platform for high quality data and advanced analytics. Our seasoned teams of industry specialists across each product provide unparalleled insight creating a foundation of deeper analysis and rapid discovery for users. KBRA Analytics is an affiliate of Kroll Bond Rating Agency, LLC (KBRA). KBRA is a full-service credit rating agency registered in the U.S., designated to provide structured finance ratings in Canada, and with credit rating affiliates registered in the EU and UK.
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