That shift came as depositors sought larger, more stable places to park their money amid fears that balance sheet stress could spread among smaller institutions.

However, Moody’s said the latest data from the Fed “showed that small banks — those most stressed by recent banking strains — gained some breathing room.”

The data showed improved stability in deposits for smaller banks following a sharp decline in mid-March, “suggesting some stabilization in funding conditions for small banks,” it said.

The Fed data also indicated that deposits at large banks declined in late March, which Moody’s said may reflect “balance sheet optimization” before the end of the first quarter.

This decline in deposits has been accompanied by growth in non-deposit borrowing for all banks and a modest decline in cash holdings, it noted.

“Banks’ motivation for [increased non-deposit borrowing] likely varied and may have included the desire to build cash liquidity buffers, replace deposit outflows, and continue to fund new loans,” Moody’s said.

On a year-over-year basis, small banks’ total borrowings were up 231%, and large banks’ borrowings were up 140%, which represented record growth for non-deposit borrowing, it said.

And, while banks’ cash holdings declined according to the latest data, they “remain very elevated relative to early 2023 levels,” Moody’s noted.

Additionally, Moody’s said the tighter funding conditions haven’t “translated into a notable deceleration in banks’ aggregate U.S. loan growth relative to February levels.”

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