by Mish

JPMorgan Chase & Co. has some advice for regional banks: A deposit drain is coming, so merge while you can.
The company’s investment bankers are warning depository clients that they may begin feeling the crunch in December, thanks to a byproduct of how the U.S. Federal Reserve propped up the economy after the financial crisis, according to a copy of a confidential presentation obtained by Bloomberg News and confirmed by a JPMorgan spokesman.

JPMorgan argues that some midsize U.S. banks — those with $50 billion in assets or less — could face a funding problem in coming years as the Fed goes about shrinking its massive balance sheet, according to the 19-page report the New York-based bank has begun sharing with clients.

The Fed is currently holding about $4.5 trillion of securities. The way it will get rid of them is by letting them mature and not buying new ones.
Deposit ‘Destroyed’
JPMorgan’s presentation, titled “Core Deposits Strike Back” illustrates how this process will sap bank deposits using the example of a couple who pays off a mortgage that was bundled with other mortgages and sold to the Fed. Right now, when that couple takes that money out of their bank account for that payment, the Fed uses that cash to buy another mortgage bond, recycling it back into the banking system.

A “deposit is destroyed” if the “Fed does not reinvest,” the presentation states.
JPMorgan estimates that a quantitative easing-related deposit-drain could result in loan growth lagging deposit growth by $200 billion to $300 billion a year.

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Midsize banks will have an especially hard time growing retail deposits by ramping up advertising and investing in branches, according to JPMorgan’s presentation. That’s because they lack the marketing muscle of mega banks such as JPMorgan itself, as well as Wells Fargo & Co., Citigroup Inc., and Bank of America Corp. JPMorgan, like some other banks, offers depositors cash incentives for opening new checking and savings accounts with five-figure balances.

About 42 percent, or $1.6 trillion, of the new deposits that U.S. banks have amassed since late 2009 have gone to lenders with at least $1 trillion in assets, according to data JPMorgan compiled from regulatory filings and SNL Financial.
“Large banks are making sizable investments in brand, customer acquisition and technology leading to market share gains,” according to the report.

Self-Serving Advice?

Somehow this smacks of self-serving advice. Merge with JPMorgan while you can.

By the way, it seems the banks had the playbook before the report.

Nearly every major regional bank missed its lending estimate. As discussed on April 29, a Regional Lender Loan Crash is underway.

Mike “Mish” Shedlock.

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