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Banks in Turmoil

After last month’s bank failures, big banks’ deposits are falling again

Justin Ho Apr 21, 2023
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Up until the SVB and Signature Bank failures last month, banks had been losing deposits for about a year. Itamar Dreschler of the Wharton School said as the Federal Reserve raised interest rates, banks hadn’t really been doing the same for depositors. Justin Sullivan/Getty Images
Banks in Turmoil

After last month’s bank failures, big banks’ deposits are falling again

Justin Ho Apr 21, 2023
Heard on:
Up until the SVB and Signature Bank failures last month, banks had been losing deposits for about a year. Itamar Dreschler of the Wharton School said as the Federal Reserve raised interest rates, banks hadn’t really been doing the same for depositors. Justin Sullivan/Getty Images
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A takeaway from the first quarter of the year was that at most of the big banks, average deposits fell, which is … interesting. Because when Silicon Valley Bank and Signature Bank failed last month, a lot of the banking industry thought people would pour cash into bigger banks that seemed too big to fail.

But all that might be behind us.

Up until the banking failures last month, banks had been losing deposits for about a year. Itamar Dreschler, a finance professor at the Wharton School, said as the Federal Reserve raised interest rates, banks hadn’t really been doing the same for depositors.

“So they raised interest rates, overall, on their average deposit mix, by a fraction of what the competitive interest rate goes up,” he said.

As a result, a lot of people decided to park their money elsewhere where they’re not earning next to nothing.

“Savings deposits, and checking deposits, the more liquid deposits, they flow out … that’s like clockwork,” Dreschler said. “And they move to other things, like money market funds, or other investments.”

All of that stopped last month after the bank failures. Julie Hill, a professor at the University of Alabama, said people who banked with smaller institutions started worrying that their bank could be next.

“Some of those depositors did in fact move their deposits to larger banks, that were less likely to fail, or were more likely to be backstopped by the government,” she said.

However, in the time since, Hill said people have gotten less worried about potential bank failures. And when the Federal Reserve raised interest rates again, “people became very concerned that their deposits at banks were just not generating the yield that they could get elsewhere,” according to Hill.

It certainly helped that the Federal government stepped in and made extra money available for banks that needed it, said Stephen Biggar, director of financial services research at Argus Research.

“The initial outflow, and the scare that was in effect at the time has subsided,” he said. “People realize that their bank is not going out of business.”

But banks themselves, especially smaller banks, also realized that they needed to do something to stem the flow of deposits.

Now, Biggar said, “They are paying higher for deposits, they are starting to creep those up, they’re feeling the heat so-to-speak in the competition.” He said that will put pressure on bank margins.

But on the other hand, people might have a better reason to stash money in their savings accounts.

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