June 26, 2021 / VOLUME NO. 163
The Dry Powder Problem

Banks wondering what to do with their ever-growing deposits received another interesting data point last week from the Federal Open Market Committee.

The group published its quarterly projection of future interest rate increases, known as the “the dot plot,” as part of its June meeting materials. The FOMC elected to keep the federal funds rate at its current zero-bound range for the time being, but the dot plot revealed greater consensus around a 2023 rate increase.

The projections showed that seven officials predict that rates will rise by the end of 2022, compared to four at the previous meeting. And 13 of 18 officials forecast at least one rate increase by the end of 2023, up from seven in March. Eleven believe that rates could increase twice that year; none reported that in March. 

The dot plot complicates things for banks wondering how to deploy their “dry powder,” says R. Scott Siefers, managing director at Piper Sandler Cos. Banks are awash in deposits, but face few attractive options when it comes to deploying them.

This problem exists in part because loan growth remains muted while deposit balances remain high. JPMorgan Chase & Co. is “stockpiling more and more cash, waiting for opportunities to invest at higher rates,” said Chairman and CEO Jamie Dimon on June 14. The current balance is $500 billion, according to his estimation. 

“Banks have all this excess liquidity, and they have a couple options. One is do nothing or little with it: You’re giving up earnings today to have the prospect of better earnings tomorrow,” Siefers explains. “Conversely, banks could try to preserve today’s earnings but maybe take away a little of the upside later on. The problem with that is you lock yourself into a yield today; if you think that the rates are going up, then why wouldn’t you wait until the yields are better?”

For his part, Dimon seemed equally ambivalent about investing in securities. The bank, he said, could “invest $200 billion tomorrow and earn a lot more money on it.” But they would give up that exposure to rising rates.

Siefers says the deposit stockpile, and desire to wait for a better rate environment, means more banks are naturally opting to become asset sensitive. But for now, that’s a tough place to be: anxiously waiting for the central bankers to raise rates in 2022, or for customers to draw down their deposits to normal levels.

• Kiah Lau Haslett, managing editor of Bank Director
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