The bank asked them to take their money elsewhere. As explained by its executive Jamie Dimon, the historic investment firm asked some of the companies that have the most funds deposited in it to transfer them to other entities, reducing its deposit base by $ 200 billion.
JP Morgan, one of the colossi of finance in the United States, is no exception. The largest banks in the country are flooded with money, to the point that some have begun to reject deposits and we could see that others are beginning to do so as well, says Nathan Stovall, an expert on the United States financial system, in conversation with BBC Mundo. from S&P Global.
What’s Going On
It is an unprecedented situation. We have never experienced anything like this says, Stovall. We are experiencing a liquidity crisis in reverse. Normally, when there is a recession, cash becomes a precious commodity and banks could be very aggressive in raising funds. But in the crisis caused by the pandemic, the opposite is happening. banks have too much money that they can hardly profit from. In normal conditions, banks are always eager to receive income, because with them they can grant loans and obtain interest. Those interests are the main part of your business.
But that profit margin has disappeared due to a combination of factors related to the capital requirements approved after the financial crisis of 2008, the economic blow of the pandemic, and the stimulus policy that the United States government has adopted to counteract it. To begin with, the interest rates set by the Federal Reserve have remained at 0 since March, a measure aimed at encouraging activity and the movement of money that hits the benefit obtained by financial institutions when lending. And the demand for credit has plummeted. The uncertainty about when the pandemic will end and the economy will improve advises prudence for most and few now want to borrow and take risks.
Added to this are the stimuli approved by the government, which include everything from the purchase of bonds issued by entities to direct payments to families and businesses, as well as the creation of more and more money. As a result, JPMorgan, Bank of America, and Citigroup received more than $ 1 trillion in deposits in 2020, and banks’ loan-to-deposit ratios fell to record lows, to just above 60%. Savings levels have skyrocketed. “People are literally hoarding dollars in banks, Stovall sums up.
These not only now have more difficulty making profitable deposits. Their increase also requires them to increase the capital with which they are obliged to back them, much more than it was before the crash of 2008, after which the authorities introduced measures to prevent a new collapse of the system. Several sector executives have already called on the authorities to relax those demands in the new context. According to Jennifer Piepszak, CFO of JP Morgan. It is a problem for us in the short to medium term.
How It Affects Banks And How It Can Affect People
Stovall believes that now the financial system is strong and its viability is not at stake. It’s more of a question of how much your profit can be. The expert recalls that the largest banks have many other ways of doing business and does not believe that the new government chaired by Joe Biden is going to make substantial concessions on regulatory matters. The security of the system is a priority for the government, which wants the banks to be in a position to grant loans to activate the economy, and, of course, the banks are willing to do so. And the clients? Will they find that they have nowhere to keep their money?
Some banks may tell them to look elsewhere but there will always be someone willing to receive the funds, predicts Stovall. In reality, the most direct consequence of the current scenario has been perceived for some time by those who have their savings deposited in the banks, as they receive almost zero profitability from them, and the forecasts do not suggest that this will change anytime soon. That could cause the effects of uncertain outcomes. Stovall warns that this situation may lead many small savers to seek higher-risk products and investments as the rise in the price of high volatility assets such as bitcoin seems to confirm.