US Banking System back on its feet

November 3, 2008

In the US there has been a huge upswing of deposits into the banking system. This is good news for the real estate market as those deposits will ease the credit at banks:

In just the past six weeks through to mid-October, there has been a $250 billion surge in total deposits. Until that point, deposits had been flat pretty much since market conditions worsened in March (chart 1 below). The flows are into all sizes of domestically chartered banks. The U.S. based operations of foreign related institutions, however, are witnessing sharp deposit erosion in the United States....

So far, $55 billion has flowed in through chequing and saving accounts as paycheques pile up while slower consumer spending stems the outflows. The rest of the rise has been in time deposits. Understandably, the principal motivator to deposit growth is presently risk aversion. Shell-shocked investors are playing it safe with their money, aided by the relative advantage offered by increased deposit insurance. Surging deposits are in stark contrast to the finger pointing that caused bank runs in the 1930s. It should allow U.S. policymakers to now shift more of their focus away from supply-side credit issues and toward stimulating the demand side of the economy.

Scotia Economics, Capital Points, 31 October

We are not out of the recession yet, but with the credit system running again properly, we can see the light at the end of the tunnel.

While there are no longer 40 year amortized mortgages available in Canada (probably a good thing - it's exotic products like this which inflated the US market), it's good to see the liquidity crisis gradually being solved.