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Commercial banks took in $47.2 billion in deposits in the week ended March 12 following an inflow of $43.3 billion the previous week, bringing cumulative increases since July to $510 billion. These deposits will help give banks the capacity to make new loans. Deposit balances, which include transaction deposits, certificates of deposits (CDs), and savings deposits, fund about 60% of bank assets. This obviously means that banks are very dependent upon deposits as a source of funding and banks certainly need funding these days. Big increases in bank deposits will go a long way toward helping banks handle the many assets they have been forced to absorb onto their balance sheets in recent months, making recent developments especially important. At some point, bank deposits will grow more than enough to both absorb assets and facilitate new lending. Savings deposits have grown sharply over the past decade as a source of funding for commercial banks, representing about 42% of deposits today compared to about 30% a decade ago. It is a relatively cheap source of funding and a stable one. Although the Fed's interest rate cuts might seem to threaten the growth in bank deposits, it is notable that when the Fed cut interest rates substantially in 2001 through 2003, bank deposits continued to grow at a double-digit pace, a faster pace than in the several years prior. That was partly because of the increase in risk aversion that occurred following the bursting of the financial bubble, which obviously is a phenomenon that looks likely to influence bank deposits in the time ahead -- good news for capital-starved banks. RELATED STORIES Consumer Confidence Keeps Falling Chain Stores Remain Weak Credit Spreads Tighter
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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