Cash Management

U.S. Bank Deposits Down $1T Since April 2022

A place of maximum safety for corporate cash — the bank deposit — now appears less so.
U.S. Bank Deposits Down $1T Since April 2022
Photo: Getty Images

Over the last few years, CFOs and treasurers had parked most of their excess cash in U.S. banks, seeking maximum safety and liquidity. Now, despite the claims of banking regulators, a bank’s balance sheet doesn’t seem that safe. Or, given the risk, worth the return.

The historic, swift deposit run at Silicon Valley Bank involved withdrawal requests totaling nearly 80% of the failed bank’s total deposits ($142 billion) in two days, according to Congressional testimony from former CEO Greg Becker. Signature Bank lost 20% of its $83 billion in deposits on the Friday before being shuttered.

The flight from banks didn’t start with SVB and Signature, though. A trend of deposit outflows from U.S. banks had started nearly a year earlier than last quarter’s turmoil — deposits had already declined by about $400 billion year-over-year by early February 2023. (See chart, Commercial Banks Replace Deposits.) As of May 3, U.S. commercial banks had lost nearly $1 trillion in deposits since April 2022.

The initial cause, say the experts, was the failure of many banks to pay customers higher rates on their savings as inflation soared and the Fed increased the price of credit. Then the problems at three banks — SVB, Signature, and First Republic (acquired by JP Morgan Chase with help from the government) — caused deposits to flee banks that fit the same rough balance-sheet parameters, like a high percentage of uninsured deposits.

According to data from the New York Federal Reserve Bank, that led to a concentration of “the most acute outflows” occurring at super-regional banks — those with $50 billion to $250 billion in assets. (See chart below.) Bank customers didn’t do much differentiation in balance sheet quality.

Super-regional banks, like KeyCorp. and M&T Bank, for example, have a much more diverse deposit base than SVB, serving consumers in various states and businesses in various industries, and many had more minor paper losses in their securities portfolios.

A New York Federal Reserve Bank paper found that the similarities to runs on rural banks in the 1930s heightened SVB’s and Signature’s steep deposit declines. “Both SVB and [Signature] had a depositor base where depositors reportedly interacted with one another in their regular business dealings. SVB’s depositors were connected through venture capital networks, and SB’s depositors were connected through law firm networks,” according to the New York Fed’s Liberty Street Economics blog.

Migration to Money Markets

Some depositors returned funds to banks once the FDIC said it would cover deposits eligible for insurance with no cap. Others may return once banks raise the interest rates they’re willing to pay on deposits. But others have entirely taken some money from the traditional banking system, moving their cash into government or Treasury money-market funds (MMFs). Those funds offer a higher yield and, if holding only Treasuries, are a relatively safe place to store cash. And by regulation, they must hold high-quality, short-term, and very liquid assets.

“MMFs, continue to be ‘flight-to-quality’ asset classes given lower credit and liquidity risks and higher yields relative to bank deposits,” said Fitch Ratings in a May 9 commentary.

But money market funds have had problems during financial market turmoil. The U.S. government and the Fed have had to step in and backstop the market at times, most recently during the pandemic, as panicky customers tried to redeem their shares. 

In light of the possibility Congress does not raise the U.S. government’s debt ceiling on June 1, a default by the U.S. Treasury “could pose liquidity and headline risks and ratings pressure for U.S. Treasury-only MMFs,” according to Fitch.

For now, some corporate treasures may have more faith in the U.S. government as a counterparty with high credit and are happy to earn greater returns simultaneously. 

Looking Forward

Going forward, CFOs should be focused on specific characteristics of banking partners, given the events of March: elevated uninsured deposit sensitivity, the shift toward higher-cost wholesale funding as deposits ran off, the need for banks to pass on more of the change in interest rates to depositors if they want to stabilize or reverse deposit declines, and the effect of tighter underwriting on loan growth and credit losses, said Fitch.

But it wouldn’t be smart to focus on only those areas.

Because losses on uninsured deposits associated with business payments are most likely to create spillovers, providing higher coverage on these deposits increases financial stability without expanding the safety net more broadly. — FDIC Options for Deposit Insurance Reform

“We should be humble about our ability — and that of bank managers — to predict how losses might be incurred, how future financial stress might unfold, and what the effect of financial stress might be on the financial system,” said Michael S. Barr, the Federal Reserve’s vice chair for supervision in prepared testimony before a House of Representatives committee on May 16.

Indeed, It may take some change in Federal Deposit Insurance Corp. rules to help treasurers and CFOs get comfortable again with all but the largest U.S. banks.

One option in the Federal Deposit Insurance Corp.’s proposal to reform the deposit insurance system is “targeted coverage.” The focus would be providing significantly higher (the current cap is $250,000) or unlimited insurance coverage to business payment accounts. 

“Because losses on uninsured deposits associated with business payments are most likely to create spillovers, providing higher coverage on these deposits increases financial stability without expanding the safety net more broadly,” according to the FDIC’s analysis.