The recent rally of regional U.S. banking stocks has led to market speculation that the banking crisis is over. However, ongoing outflows of bank deposits and the Federal Reserve's continued "transfusion" suggest the crisis persists.
On Thursday, May 18, local time, data from the U.S. Investment Company Institute showed a continued trend from the previous week, with money market funds growing in size. As of the week ending May 17, about $13.6 billion flowed into U.S. money market funds, pushing the size of these funds to a historic high of $5.34 trillion. Over the past three months, these funds have grown by more than $520 billion.
The steady inflow of funds into money market funds is due in part to the increased appeal of deposits as a result of higher market rates following continued hikes by the Fed. On the other hand, the banking crisis has made "small bank deposit risks" unappealing, leading funds to safer money market funds.
In addition to regular Treasury bond investments, money market funds are also a primary participant in the Fed's $2.25 trillion overnight reverse repurchase agreements (ON RRP), with a large volume of funds moving away from banks and being deposited with the Fed. This is creating significant pressure on banks.
As previously reported by Business Times, with the U.S. debt ceiling nearing, short-term Treasury yields continue to fall. Money market funds are now more inclined to shift funds from Treasury bonds to RRP tools, which could further reduce bank reserve balances and continuously hit liquidity. In times of banking turbulence, the decrease in reserves may amplify industry risks.
Data shows that the funds invested in Treasury bonds, overnight reverse repurchase, and institutional debt securities have increased to $4.44 trillion, with an increase of $95.5 billion. Retail funds inflow exceeded $14 billion, and institutional funds saw only a slight outflow.
The surge in money market fund inflows might suggest that the Fed's H8 deposit report to be released later today will show the continued run on U.S. banks.
Meanwhile, the Fed's "transfusion" to banks is not over yet. As of the week ending May 18, the Fed's outstanding loans totaled $96.1 billion, higher than the previous week's $92.4 billion.
In particular, loans provided by the Bank Term Funding Plan (BTFP), an emergency financing tool launched by the Fed in response to the Silicon Valley banking crisis, surged to $87 billion, while loans provided through the discount window fell to $9 billion. This indicates that participation in BTFP is becoming increasingly high.
The rebound of U.S. bank stocks this week seems to suggest that the market believes the banking crisis has passed.
Continuing the upward trend from Wednesday, the U.S. stock bank index KBW Bank Index (BKX) closed up 0.6%. The regional bank index KBW Nasdaq Regional Banking Index (KRX) rose 0.06%. The regional banking ETF SPDR S&P Regional Banking ETF (KRE) rose 0.6%. All surpassed their highest points since May 1, set on Wednesday.