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Will CBDC FedNow Put Regional and Smaller Banks Out of Business This Summer?

The failures of Silvergate Bank, Silicon Valley Bank, Signature Bank and the current struggles of the First Republic and Pacific West Bank have as bank deposits flee to the perceived safety of the big banks.

In the chart below, you can see the flight of deposits from small to large banks.

To make matters worse for banks, there are rising interest rates and higher yielding alternatives readily available such as money market funds (MMFs) or US Treasury ETFs.

These alternatives are now a few thumb taps and trips away from depositors, making the near-zero rate of return on bank deposits far less attractive to many consumers and businesses.

In the following graph you can see fall in bank deposits and increase in FMMs.

Will CBDC FedNow Put Regional and Smaller Banks Out of Business This Summer?

Here we can see the US Treasury 3-month major premium cedes control of bank certificates of deposit (CDs).

Those issues, plus the new FedNow service, which will begin testing in July, could pose an uphill battle for banks to retain deposits.

The Federal Reserve’s new FedNow program will allow banking customers at 10,000 financial institutions to instantly transfer funds in and out of bank accounts 24/7/365. This is probably the biggest innovation since mobile banking and investment apps and will give customers greater access to their money than ever before.

“We reiterate our view that FedNow will represent a material change in the way consumers use electronic money.” TD Cowen analyst Jaret Seiberg said in a recent Marketwatch report.

FedNow can accelerate depositors’ ability to take money out of bank accounts and redirect it to higher-yielding alternatives.

With banks under increasing pressure to curb outflows, these trends could add to their problems, especially if banks are forced to sell even more assets that currently have unrealized losses.

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