Lending also retreats after four weeks of gains
The numbers: Deposits at commercial U.S. banks declined in the week ended May 3, according to the Federal Reserve on Friday.
Deposits fell to $17.15 trillion from $17.16 trillion in the prior week, the Fed said. There has been a steady erosion in deposits as interest rates have risen. A main reason is that money-market funds are offering higher rates for consumer savings. At the beginning of March, bank deposits were $17.66 trillion.
At the same time, lending at commercial banks fell to $12.13 trillion from $12.14 trillion in the prior week. That’s the first decline in five weeks.
Key details: Deposits at large banks fell to $10.70 trillion from $10.71 trillion in the prior week. Small banks saw their deposits shrink slightly to $5.247.2 trillion from $5.247.5 trillion in the prior week.
Big bank lending fell to $6.71 trillion from $6.72 trillion in the prior week. Lending at small banks fell to $4.384 trillion from $4.386 trillion in the prior week.
Big picture: After rising at a steady upward trend, bank lending peaked in November and came down sharply as the year began. Since then, bank lending has been treading water.
In addition to causing deposit outflows, the Fed’s rapid rate hikes has lowered the value on bank assets, leading to stress in the banking sector and three major banks failures. In response, banks are tightening their loan standards.
Senior bank lending officers told the Fed this week in a quarterly survey that they expect they will tighten standards on new loans all year.
Economists are worried that if banks tighten credit too much, it could sour consumer confidence and lead them to cut back spending. This would hit the economy at a fragile time when second quarter GDP growth is already tracking at a paltry 0.2% annual rate.
The University of Michigan reported Friday that consumers are growing concerned, causing the index of consumer sentiment fell in May to its lowest level since November.
Market reaction: The Dow Jones Industrial Average DJIA, -0.03% and the S&P 500 index SPX, -0.16% both suffered their second straight losing weeks in part from worries about the continued health of the banking sector. PacWest Bancorp PACW, -2.99% continued a recent decline on Friday on concern about its longer-run viability.