Highlight of the Week
Jamie Dimon Released His Annual Letter to Shareholders
- Dimon’s annual letter to shareholders was released on Tuesday of this week, in it he commented on the recent collapse of SVB and Signature Bank.
- Dimon stated that the current crisis “involves far fewer financial players and fewer issues that need to be resolved” than in 2008.
- The collapse of SVB and Signature will expose issues with bank management and supervision and will have repercussions for years to come.
- While large banks such as JPMorgan received an inflow of deposits as a result of the collapse, Dimon stated that this did not ‘benefit’ large banks and that “Any crisis that damages Americans’ trust in their banks damages all banks”.
Rate Curves
Rapid Report:
Deposit Outflows and the FED’s Reverse Repo Facility
- As of 4/4/2023, $2.21T is earning a 4.80% annualized rate through the FED’s reserve repo facility.
- The facility often referred to as the Overnight Reverse Repo Program (ON RRP) was designed to reduce the likelihood of a below-target federal funds rate.
- Money Market Funds (MMFs) are the largest repo counterparty with over 40% of MMF assets invested in the ON RRP. MMFs provide the FED with excess reserves in exchange for Treasuries that the FED will repurchase later at a higher price. The repurchase price is the difference in the original plus interest.
- In 2021, the FED raised the overnight reverse repo rate by 5 bps. With interest rates near 0% and rapidly increasing inflows of assets, MMFs were struggling at the time to cover operating costs.
- This WSJ Article highlights the view that if the FED was to lower the previous adjustment to the overnight rate and set the annualized rate at 4.75%, while simultaneously pushing up the Internal Rate on Reserve Balances (IORB) to 5% (currently 4.9%), then more MMFs would be encouraged to lend to banks instead.
- However, some within the FED are skeptical that it will stem bank outflows and want to allow for market forces to dictate where reserves will move throughout the financial system. In the absence of the ON RPP the same yield could be generated with 3-month T-Bills (currently 4.85%).
- While MMFs could be a draw on bank deposits the overall deposit balance within the banking system still exceeds $17T. As of 3/22 deposits were down 4.141% YoY. Where would average deposit rates at banks need to land to stop deposit outflows in todays new normal – 50bps, 1%, 3% or maybe even out past the risk-free rate?
