People have moved $500 billion into money-market funds and major banks since SVB imploded. JPMorgan offers 3 reasons why the shift will continue.

• Higher rates, QT and trillions in uninsured accounts are pressuring vulnerable banks, JPMorgan said.
• Since SVB, $500 billion has flowed from smaller lenders to money market funds and big banks.
• "An FDIC guarantee of all US bank deposits would certainly help, but it might not be enough to completely stop this deposit shift."

Deposits could continue moving out of less secure banks, even with bigger guarantees from the government, JPMorgan analysts wrote in a note published Wednesday. 

Vulnerable US lenders have lost around $500 billion since Silicon Valley Bank collapsed, as depositors took their money out in search of safer havens, such as money-market funds and bigger banks.

JPMorgan attributed that to three factors: the Federal Reserve's interest rate hikes, its quantitative tightening program, and an estimated $7 trillion in uninsured deposits.

"An FDIC guarantee of all US bank deposits would certainly help, but it might not be enough to completely stop this deposit shift," JPMorgan said.

Analysts noted that Fed rate hikes have not only incentivized depositors to transfer their deposits into higher-yielding money market funds, but they also created losses in banks' bond portfolios that made depositors nervous about the safety of their money.

That was the case with SVB, and US money market funds recently saw their largest money gains since 2020.

"While money market funds are not guaranteed, they invest in the safest and most liquid instruments," the analysts wrote. "In other words, not only are money market funds offering superior yields, but they also look safer than bank uninsured deposits."

Meanwhile, the central bank's quantitative tightening policies to remove money out of the economy have gradually eroded liquidity in banking, they added.

Before the SVB crisis, $3 trillion in reserves were held by the industry, but most of that was in foreign-owned banks and US giants. Just a fraction was in mid-size and small lenders.

"In other words from a liquidity point of view, mid-size banks have been the ones most starved of reserves," JPMorgan said.

To be sure, an FDIC  guarantee of all US bank deposits would help ease fears about the $7 trillion that's currently uninsured.

But to stem the outflow to money-market funds and to blunt the impact of QT, banks would need to offer more competitive deposit rates, and this would get more difficult as interest rates continue to rise, according to the note.

The upshot for the economy is that banks could become more cautious about lending, and smaller banks account for a disproportionate share of commercial and personal loans, JPMorgan said.

"Non-financial corporate businesses look less vulnerable as they could in principle instead make use of debt capital markets to offset potential reduced bank lending, though this is clearly dependent on market conditions," analysts added.