CAUGHT BETWEEN LEAKING DEPOSITS AND UNREALIZED LOSSES

Since the Fed started to hike interest rates at the end of Q1 2022, the gap between what banks charge for loans and deposits rates have never been so wide. At the same time, deposit growth has outpaced loans by more than $4.5 trillion since the end of 2019. A considerable amount of these funds was allocated into the bond market. By the first quarter of 2022, U.S. commercial banks and savings and loans associations that file GAAP financial reported $64.14 billion in unrealized losses, down from $4.9 billion in the prior quarters. Deposit costs increased more notably by end of Q3 2022 due to the Federal Reserve's rate hikes.

Money woke up and began searching for higher yield alternatives, such as U.S. treasuries and money market opportunities. So far, banks have been okay with these outflows as they were sitting on cash with record low-levels of loan-to-deposit ratios. This dynamic will likely change soon.

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