Bank Walks Could Be Harmful to the Banking System and Affect Credit

Bank Walks Could Be Harmful to the Banking System and Affect Credit

Bank walks are a new liquidity movement phenomenon identified by analysts, characterized by a slow drift of deposits to take advantage of better yield opportunities. Such "walks" might be malicious to the banking system, as they cannot be stopped and affect credit availability.

Concept of ‘Bank Walks’

Bank walks have been so-called by analysts due to their sluggish action when compared to bank runs, which are slow movements of deposits caused by the constant search for higher yields. According to an ongoing study titled "Destabilizing Digital Bank Walks," they "cannot be stopped by any deposit insurance, and that will undermine the banking system’s stability in the coming months."

The study mentions that regulators often consider deposits sticky, meaning they are composed of depositors’ savings that hardly move. This means that banks can place part of the deposits in treasuries with a determined maturity. However, the study has revealed that deposits are not as sticky as they were once considered and can move around the financial system as a consequence of digital banking.

This exposes banks to losses derived from the sale of treasuries and other instruments before their maturity, and banks can only absorb some of the losses before defaulting.

Alleged Negative Effect on Credit

Bank walks are alleged to have a negative effect and hurt the availability of credit. The slow siphoning of funds to higher-yield alternatives such as money market funds and the US Federal Reserve reverse repo could lead to a credit crunch. There are currently more than USD 2 trillion in funds in the facility, which was created in 2013.

According to Jim Bianco, president of Bianco Research, a market analysis firm, the United States Fed’s upcoming interest rate decision could be decisive in further developing a "bank powerwalk." On April 9, he stated:

"If the Fed decides to raise rates again next month, money market funds will soon be advertising yields with a five-handle. That will turn the bank walk into a ‘bank powerwalk.’"

Bianco added that the outflow of deposits is likely to affect small companies, which employ the majority of the workforce in the country and are best served by small and medium-sized banks.

What is your take on bank walks and their effect on credit? Please post your comment.