Growth in core deposits has slowed this year, but trends hardly point to a squeeze on bank liabilities.
Coffers overflowed during the depths of crisis, largely reflecting a flight to safety among savers that has historically acted as a funding cushion for the industry during times of stress.
But deposits are fundamentally the flip side of lending: a bank creates money to credit a borrower's account and when it is spent it generally becomes deposits at different banks. The start of the surge in core deposits in late 2008 (see charts) also accompanied a pop in lending around the same time. (A hallmark of the credit cycle is that borrowers turn to banks — including existing credit lines — when capital markets become inhospitable.)
Now, however, bank lending is in a relentless swoon, and the M2 money supply (currency, checking and savings deposits, time deposits with balances of less than $100,000 and retail money market funds), adjusted for inflation and seasonal factors, has about flatlined in recent months. (Private-sector debt overall has also been dropping, though total domestic borrowing excluding the financial sector has increased as a result of government deficit spending.)
That worrying economic reading has helped stoke anxiety over the prospects for deflation — a tide that would drag banks down along with everything else — and the message about bank growth is tautological. But it is not a signal that bank liabilities are under pressure — the funding requirements of the industry are simply declining.
In fact, some basic conditions that have supported deposit flows still prevail. Prominently, low rates have made it difficult for money market funds to compete, significantly increasing deposits' share of the money supply.
In July, retail money market balances were about even with April at $746.4 billion, but down almost 10% from the end of the year. Savings accounts, which include money market deposit accounts, had increased about 3% from April and 5% from the end of the year to $5.1 trillion.
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