US banks hoard $3.3 trillion in cash amid fears of an economic slump (2024)

• Since the collapse of SVB and Signature Bank in March, US banks have become cautious on lending.
• They're holding a cash pile of $3.3 trillion amid fears of an economic slowdown, Reuters reported.
• The sector remains subdued after Moody's slashed the credit ratings on 10 US banks in August.

Since the dramatic banking turmoil that saw both Silicon Valley Bank and Signature collapse in March, America's biggest lenders have become considerably more cautious when extending loans.

US banks are now holding back almost $3.3 trillion in cash amid fears of an economic slowdown, ongoing deposit withdrawals, and stricter liquidity rules, Reuters reported.

The cash pile is slightly lower than a $3.49 trillion peak seen in the immediate aftermath of SVB's collapse – though still well above pre-pandemic averages.

March's banking crisis spooked lenders and saw a significant cutback in credit issuance, which has not yet recovered as banks prefer to hold cash as insurance against a potential US economic downturn later this year.

"This is a logical response to a slowing economy and particularly to a scenario where you're seeing deposit outflows and you need to conserve cash", David Fanger, vice president at Moody's told Reuters on Tuesday.

"What happened in March was a big wake-up call," he added.

The banking sector has remained subdued this year and was hit with a ratings downgrade in August.

Last month, ratings agency Moody's lowered the credit ratings of 10 small- and mid-sized US banks by one rung, and placed a slate of larger firms under review for potential downgrades, including BNY Mellon, US Bancorp, and State Street.

Moody's justified the decision as a more difficult operating environment for banks amid higher interest rates, an uncertain base of deposits, and a murky outlook for the broader economy.

"To date, stress on US banks has been reflected almost exclusively in funding and interest rate risk related to monetary policy tightening, but a worsening in asset quality will likely come," the agency wrote in a report. "We continue to expect a mild recession in early 2024, and given the funding strains on the US banking sector, there will likely be a tightening of credit conditions and rising loan losses for US banks."