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Will US Banks Start Limiting Their Balance Sheets?

Limiting Their Balance Sheets
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EDITOR NOTE: For several months, the gap between commercial bank deposits and issued loans has grown wide to record levels. This may seem like a prudent thing to do--the opposite of the Texas Ratio warning in which banks are holding an excessive level of risky debt. But this also signals another danger. Banks that are on the verge of failure could consider limiting their balance sheets and then shift into cost-cutting mode. This means a reduction in staff, services, financial offerings, and loans. It’s exactly what we’re seeing now. And it’s enough to make any responsible investor or depositor wonder what these banks see that the mainstream crowd doesn’t.

About two-thirds of U.S. banks are either already taking measures to limit the growth in their balance sheets or would take steps to cap them if they continue growing, a Federal Reserve survey of bank finance officers showed on Thursday.

The concerns about the size of their balance sheets reflected in the Senior Financial Officer Survey came as 40% of respondent banks reported faster-than-expected growth in end-of-day reserve balances. The largest factor driving that growth was deposits, which broadly are growing faster than bank officials had estimated.

Should banks broadly begin limiting their balance sheets, it could have implications for the availability of bank credit as the U.S. economy pulls out of the recession triggered by the COVID-19 pandemic.

"Among the two-thirds of respondents who reported their bank is limiting, or would limit under certain growth assumptions, the size of its balance sheet, almost half rated net interest margin pressure and return on assets as important or very important factors in that decision," the survey said.

Likely measures they may take include allowing outstanding wholesale funding liabilities to mature without replacement and reducing deposit rates on non-operational deposits, according to the survey, which included banks that account for roughly 75% of the reserves in the U.S. banking system.

Originally posted on Reuters

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