Bank walks are a new liquidity movement phenomenon that analysts have noted is characterized by the slow movement of deposits to take advantage of better yield opportunities. Such “walks” may prove pernicious to the banking system because they cannot be stopped and affect the availability of credit.
What is a “bank walk”?
A bankwalk is what analysts call it because of its slower action compared to a bank run, a slow movement of deposits caused by the constant search for higher yields. According to an ongoingstudytitled “Destabilizing Digital Bankwalks,” these “cannot be stopped by any deposit insurance and will undermine the stability of the banking system in the coming months.
The study notes that regulators often consider deposits to be sticky, i.e., composed of depositors’ savings and not moved frequently. In other words, banks can deposit a portion of their deposits in government bonds with a defined maturity. However, this study finds that as a result of digital banking, these deposits are not as sticky as once thought and can move freely within the financial system.
This means that banks suffer losses from selling government bonds and other financial instruments before maturity, and only to the extent that they are able to absorb those losses before default.
The alleged negative impact on credit
Subsequently, bank walks are said to have an adverse effect on credit availability. The slow siphoning of funds into higher yielding alternatives, such as the money market funds that manage the Federal Reserve’s reverse repos, could lead to a credit crunch; there are currently over $2 trillion in funds belonging to this facility, which was created in 2013.
According to Jim Bianco, president of market analysis firm Bianco Research, the U.S. Fed’s upcoming interest rate decision could be decisive for further developments in the “bank powerwalk.”On April 9 he said,:
If the Fed decides to raise rates again next month, money market funds will soon be touting yields in the five handles. If that happens, the bankwalk will turn into a “bank power walk.”
Bianco added that this deposit outflow could affect the small businesses that employ most of the country’s workers, the ones small banks do best.
What do you think about the concept of bankwalks and their hypothetical impact on credit? Let us know in the comments section below.
Image credit: Shutterstock, Pixabay, Wiki Commons
