Investment bankers at JPMorgan Chase [1] are encouraging its mid-size bank partners to start merging—or risk going under once the Federal Reserve begins to reverse quantitative easing in December.
According to a 19-page confidential presentation obtained by Bloomberg News, [2] JPMorgan is warning banks with $50 million or less in assets that they could face a funding problem due to Fed policy changes over the next couple of years.
“The Fed’s bond-buying spree from 2009 to 2014, dubbed quantitative easing (QE), inadvertently left the industry flush with deposits,” Bloomberg reported. “Investors took money they got selling mortgage-backed bonds and Treasury securities to the Fed and parked it in U.S. retail and commercial bank accounts. This created some $2.5 trillion in excess bank deposits, according to JPMorgan. It estimates that 60 percent, or $1.5 trillion, of that money will trickle out of banks in the next four to five years if the Fed follows through with recent guidance and begins reversing quantitative easing in December.”
Currently, the Federal Reserve holds around $4.5 trillion in securities. It will not replace these once they reach maturation. The presentation, called “Core Deposits Strike Back,” argues that this ultimately “destroys” deposits.
Bloomberg reported: “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.”
The presentation also warns mid-size banks that retail deposits may be hard to come by in the future, too.
“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.,” Bloomberg reported. “JPMorgan, like some other banks, offers depositors cash incentives for opening new checking and savings accounts with five-figure balances.”
This gives larger banks the upper hand when it comes to retail deposit gains, and to keep up, smaller banks may want to consider “selling or buying rivals to bulk up on retail deposits,” Bloomberg reported.
Some banks have already begun to do this; Pinnacle Financial Partners Inc. recently acquired BNC Bancorp, and Canadian Bank of Commerce purchased PrivateBancorp Inc.