Banking Industry Facing Challenges as Money Flows to Larger Banks and Funds

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Banking Industry Facing Challenges as Money Flows to Larger Banks and Funds

Recent trends in the banking industry are causing concerns about the possibility of another recession. According to Bank of America (BofA), smaller banks are losing money while bigger banks and money market funds are seeing an inflow of money. Deposits at small banks have fallen by $120 billion while borrowing has increased by $253 billion, which is most likely from the Federal Reserve. Capital Economics warns that unless banks increase their deposit rates, they will have to reduce the size of their loan portfolios, which could further impact economic activity and lead to a recession.

European banks are facing similar challenges with Deutsche Bank and Credit Suisse both experiencing difficulties. Deutsche Bank's five-year credit default swaps (CDS) hit the highest level since late 2018, and Credit Suisse had to secure liquidity from the Swiss National Bank. Customers were withdrawing money and counterparties were demanding guarantees, which is not a good sign for interbank lending that relies heavily on trust.

Despite the challenges, U.S. and European stock futures were higher on Monday, with relief that First Citizens BancShares Inc is in advanced talks to acquire Silicon Valley Bank. There was also talk that the Federal Reserve could expand its new lending programme for banks, which may help to reassure depositors. Fund futures show that there is an 88% chance that the Fed will not make any changes in May, while a July rate cut is priced at better than 90%.

In other news, German IFO survey for March is expected to be around 91.0. Bank of Spain´s Governor Pablo Hernandez de Cos will deliver a speech on the economy, and ECB Board members Frank Elderson and Isabel Schnabel will speak, as will Andrew Bailey, Governor of the Bank of England. Federal Reserve Board Governor Philip Jefferson will speak on the implementation and transmission of monetary policy.

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