Summary
Highlights
Nearly $8 trillion has quietly moved out of the traditional banking system. This slow, rational, and silent migration, termed a 'shadow run,' is due to the significant difference in interest rates offered on savings accounts (0.61% nationally) compared to 4-week US Treasury bills (3.62%).
Large banks have scale and wholesale funding markets to replace deposits, unlike the 9,000+ smaller regional and community banks. These smaller banks, holding about $5.5 trillion in deposits, are quietly being drained as depositors seek higher yields from Treasury bills and money market funds. This deposit loss structurally devastates their ability to lend money.
Regional and community banks are primary lenders to small businesses, farmers, and commercial real estate developers. Many already have high commercial real estate exposure (over 300% of their capital base). When deposits leave, loans follow, leading to a credit contraction. This affects small businesses, commercial real estate, and agriculture, showing up as layoffs, delinquent loans, and unapproved planting loans, rather than immediate headlines.
The Federal Reserve is considering a rate hike due to inflation, which would widen the yield gap between Treasury bills and bank savings accounts. A wider gap would accelerate the shadow run, leading to more deposits leaving regional banks and further tightening credit conditions, which the Fed might not be adequately factoring into its models.
Firstly, personal savings earning less than 2% are underperforming; consider alternatives like 4-week Treasury bills (3.62%) or high-yield savings accounts (up to 4.15%). Secondly, regional bank stocks face structural headwinds due to deposit drainage, impacting their ability to grow loan books. Thirdly, the credit contraction is a slow, unannounced process, affecting small businesses, real estate, and eventually the wider economy.