Apr 2Liked by Meyrick Chapman

Ok so let’s assume banks increase their deposit rate to avoid capital flight. Is there a possibility they will extend *more* credit in order to maintain profitability? Maybe stuff like that’s shorter duration or variable rate… invoice factoring, equipment leasing.

I guess the larger question is how does the average regional bank solve their profitability problem after they’ve solved their bank run problem?

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New York Fed just posted this article: https://libertystreeteconomics.newyorkfed.org/2023/04/monetary-policy-transmission-and-the-size-of-the-money-market-fund-industry-an-update/

1/ The post nicely summarises the dynamic, but doesn't make a qualitative judgement as to its impact on bank funding.

2/ The report also shows the beta of deposits to Fed Funds is MUCH lower in this cycle (<25% of previous beta) which means deposit rates are much slower to respond to changes in monetary policy.

3/ There is NO consideration of yield curve inversion - which I deliberately omitted but which is fundamental to the unfairness of RRP rates because MMF can take advantage of closely following monetary target levels, a course not available to banks because it would undermine the entire business model.

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