The Liquidity Bullwhip

By Curt Long, NAFCU Chief Economist and Vice President of Research

Curt Long, NAFCU Chief Economist and Vice President of Research

A feature of the COVID economy has been sudden, sharp changes in critical areas. The whipsaw behavior of supply chains, prices and interest rates makes financial management and forecasting extremely challenging. For credit unions and banks alike, liquidity is another area where conditions are changing rapidly. A survey of NAFCU members conducted in late August 2022 indicated that liquidity risk concerns were higher than at any point in recent history.1 This follows a period in 2020 and 2021 when financial institutions were awash in deposits and dealing with resulting dilution of their net worth.

The suddenness of the change in liquidity conditions is prompting questions. Why did conditions change so quickly, and what that might mean going forward? Federal Reserve economists provided their perspective in two publications.

A June 2022 study reviewed the extraordinary rise in bank deposits in the early stages of the pandemic. The authors cite four reasons for the explosive growth:2

  • First, loan growth surged in 2020 as businesses drew upon their lines of credit. The old adage holds that loan creation results in new deposits as borrowers either stash their funds themselves or create deposits for others via consumption. Total business sector borrowings in the first half of 2020 were more than three times greater than in the first half of 2019.3
  • Second, the asset purchases associated with the Federal Reserve’s monetary policy implementation created deposits under certain conditions. Where the Federal Reserve purchased Treasuries and mortgage-backed securities from institutions with reserve accounts, those transactions represented a simple swap of one asset (securities) for another (central bank reserves). However, purchases from nonbanks do create new deposits.
  • The other two deposit-generating impulses—fiscal stimulus and higher personal savings rates—were abundantly clear to credit unions as deposit surges peaked with the distribution of stimulus checks and account outflows slowed while the economy was shut down.

A review of these factors shows the breadth of economic forces driving the rise in deposits early in the pandemic. Households, businesses and the Federal Reserve each had a part to play. However, each sector is now contributing to the reversal. The Fed’s balance sheet reduction is well underway. Commercial and industrial loans were down over 8% from their peak as of October. And fiscal support for households is ebbing as they resume pre-COVID spending patterns.

A study from October 2022 focuses on household saving behavior and attempts to estimate the accumulation of excess savings over the course of the pandemic.4 While numerous such efforts have been attempted, the Federal Reserve economists’ approach is novel in that it disaggregates savings by income quartile and identifies the factors behind the savings growth. As of mid-2022, the researchers estimated that each income quartile still had positive excess savings, but that they were receding quickly. Not surprisingly, for low-income households this was primarily due to curtailment of fiscal support. High-income households tended to cut expenditures early in the pandemic but have since ceased to do so, resulting in the erosion of their excess savings.

One notable element that has dampened growth in disposable income (and, by extension, savings), has been a sharp increase in taxes. Based on the authors’ calculations, tax payments in the four quarters ending June 2022 were over $600 million above the pre-COVID trend. This points to another possible explanation for the ebbing of deposits at a system-wide level. If fiscal stimulus created rapid deposit growth, higher taxes coupled with reduced government spending may be playing a large part in leeching deposits from the economy.

More insights from the NAFCU Research Team can be found on the NAFCU website at 


  1. NAFCU, 2022 Report on Credit Unions, accessible at
  2. Castro, Andrew, Michele Cavallo, and Rebecca Zarutskie (2022). “Understanding Bank Deposit Growth during the COVID-19 Pandemic,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, June 06, 2022,
  3. Financial Accounts of the United States, Board of Governors of the Federal Reserve System, accessed November 22, 2022, at:
  4. Aladangady, Aditya, David Cho, Laura Feiveson, and Eugenio Pinto (2022). “Excess Savings during the COVID-19 Pandemic,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, October 21, 2022,