During the week ending March 22nd, Federal Reserve data showed depositors pulled another $126 billion out of US banks. The outflows also shifted institution classes, this time being withdrawn from the nation’s largest institutions.
On a seasonally adjusted basis, the largest 25 banks saw $90 billion withdrawn over the week, according to Fed data. Smaller banks were able to stabilize their outflows, after enduring massive withdrawals the week before, following the seizure by federal regulators of regional banks Silicon Valley Bank, and Signature bank. On a seasonally adjusted basis, smaller lenders actually gained back $6 billion.
Total industry deposits dropped to $17.3 trillion, a decline of 4.4% from the same time one week prior. It was the lowest reading since July of 2021.
The new numbers are a continuation of some trends which were already being noted. Prior to the Silicon Valley Bank failure, deposits had been declining at all banks, dropping each of the first two months of the year. In the fourth quarter of 2022, deposits at all banks had been down 5% annually.
Industry observers attribute the shift to the pressures growing out of an aggressive Federal Reserve’s tightening of monetary policy in an attempt to rein in a stubbornly persistent inflation.
Early in the pandemic, while the Fed maintained the interest rates at historically low levels in an effort to support the economy, banks saw deposits grow. As inflation picked up and the Fed raised rates to cool off the economy, depositors began to withdraw their funds to move them to investments with higher yields. By the second quarter of 2022, this produced the first year-over-year decline in deposits.
At least some of the deposits are moving into money market funds. $508 billion has flowed into those funds since the beginning of January, according to a research note from the Bank of America. That marked the highest quarterly inflow seen since early in the pandemic. $60 billion more flowed into those assets just in the past week.
In the aftermath of the bank failures seen in March, government and industry officials have been seeking to staunch massive deposit outflows. Regulators promised to extend the FDIC coverage of deposits to all accounts in the affected banks, regardless of size, in an effort to calm any panic. They also pledged similar support to other regional banks in similar straits. In the case of another troubled regional bank, Frist Republic, eleven giant banks moved $30 billion in uninsured deposits to it, to help stabilize its situation.
The conundrum banks are facing is that if they increase the rates on their deposits, they will be sacrificing immediate profitability to discourage outflows. However if they do not, the outflows may require them to sell assets at a loss to generate the liquidity to support the outflows, and that will impact profits, and could put the bank in danger of entering an illiquid situation.
In a single day, Silicon Valley Bank customers withdrew $42 billion, which left the bank with a negative cash balance of $958 million.
At that point, regulators stepped in and seized the bank, which had been the 16th largest in the United States.
