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27 » VISIT US ONLINE @ DSNEWS.COM CHASE WARNS MIDSIZE BANKS OF FED DEPOSIT DRAIN Investment bankers at JPMorgan Chase are encouraging its midsize bank partners to start merging or risk going under once the Federal Reserve begins to reverse quantitative easing in December. According to a 19-page confidential presentation obtained by Bloomberg News, JPMorgan is warning banks with $50 million or less in assets that they could face a funding problem due to Fed policy changes over the next couple of years. "e Fed's bond-buying spree from 2009 to 2014, dubbed quantitative easing (QE), inadvertently left the industry flush with deposits," Bloomberg reported. "Investors took money they got selling mortgage-backed bonds and Treasury securities to the Fed and parked it in U.S. retail and commercial bank accounts. is created some $2.5 trillion in excess bank deposits, according to JPMorgan. It estimates that 60 percent, or $1.5 trillion, of that money will trickle out of banks in the next four to five years if the Fed follows through with recent guidance and begins reversing quantitative easing in December." Currently, the Federal Reserve holds approximtely $4.5 trillion in securities. It will not replace these once they reach maturation. e presentation, called "Core Deposits Strike Back," argues that this ultimately "destroys" deposits. Bloomberg reported: "A 'deposit is destroyed' if the 'Fed does not reinvest,' the presentation states. JPMorgan estimates that a QE-related deposit drain could result in loan growth lagging deposit growth by $200 billion to $300 billion a year." e presentation also warns midsize banks that retail deposits may be hard to come by in the future, too. "at's because they lack the marketing muscle of megabanks such as JPMorgan itself, as well as Wells Fargo & Co., Citigroup Inc., and Bank of America Corp.," Bloomberg reported. "JPMorgan, like some other banks, offers depositors cash incentives for opening new checking and savings accounts with five-figure balances." is gives larger banks the upper hand when it comes to retail deposit gains, and to keep up, smaller banks may want to consider "selling or buying rivals to bulk up on retail deposits," Bloomberg reported. Some banks have already begun to do this; Pinnacle Financial Partners Inc. recently acquired BNC Bancorp, and Canadian Bank of Commerce purchased PrivateBancorp Inc. EMPLOYMENT INCREASES, BUT IS IT ENOUGH? e employment report for April from the Bureau of Labor Statistics released in early May showed strong growth overall, with a total increase in nonfarm payroll jobs of 211,000, compared to March's increase of 79,000. Department of Labor Secretary Alexander Acosta tweeted that the report was "great news," and noted the unemployment drop to 4.4 percent. Despite the overall optimism, the housing and construction employment numbers didn't see quite this level of growth, and the 5,000 new jobs created in this sector were called a "disappointment" by First American Chief Economist Mark Fleming. Fleming noted that this growth is a 2.6 percent increase from a year ago. "Home builders are reporting that the lack of construction workers is hampering their ability to increase production, which is a desperately needed source of supply, as most markets already have very tight inventories of homes for sale," said Fleming. "In fact, we have been underbuilding residential housing relative to demand since 2009." Realtor.com Senior Economist Joseph Kirchner voiced a similar concern, stating his disappointment in April's numbers. e 5,000 construction jobs that were added are just "a fraction of what we need," said Kirchner, "and it won't solve the inventory problems that stop consumers from finding homes to buy." Not all is lost though. e overall employment rate is still high, and unemployment is dropping. Fannie Mae Chief Economist Doug Duncan noted that the U6 rate, the broadest measure of labor underutilization, fell to its lowest rate since November 2007. To Duncan, these are positives that send a clear message. "e labor market is tight, with continued declines in discouraged workers and part- timers who prefer full-time jobs," said Duncan. "e report is consistent with a faster pace of monetary policy normalization this year and supports our expectation of two rate hikes in June and September and a change in the Fed's reinvestment policy in December."

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