Bank Deposits Contracted in H1

For all the talk from the Federal Reserve and Treasury about how stable the banking system is, data suggests that the industry continues to see challenges. Not only has the survey and anecdotal information pointed to banks pulling back their lending activity, but according to data from S&P Global Market Intelligence, an important indicator critical for bank stability showed its first drop since the firm started monitoring the data since 1994.

S&P Global does rollups of Summary of Deposits data from the Federal Deposit Insurance Corp. “The US banking industry’s deposits contracted 4.8% year over year to $17.269 trillion [through June 30, 2023], as bank runs contributed to three large bank failures in the first half of the year,” the firm wrote. “The drop was the first in a data set that dates back to 1994.” It was $872 billon year over year.

The majority of large U.S. banks saw year-over-year declines in deposit balances, “with almost 30% of the $871.60 billion industrywide decline attributable to the Big Four banks, JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc.”

The concern about falling deposits is that they represent liabilities of the bank, with the money owned by depositors. The contractions come from those depositors pulling money out. It could be that the outflows are the result of depositors looking for higher-yielding returns, as Bloomberg suggested. Or it could be that some percentage of depositors, dealing with the impact of inflation, have to pull down savings to pay extra expenses.

But as happened with the failed banks like Silicon Valley or Signature or First Republic, the outflow of funds can put a strain on banks. Over years of zero interest-rate policy, many institutions had loaded up on long-term low-yield bonds to hold large inflows of cash. But those investments fell in value over the last couple of years as inflation took off and the Fed raised interest rates. Higher rates means bond prices fall and the valuation of bonds in bank assets that normally would have dropped only were cemented in place by a “held until maturity” accounting tactic.

That didn’t keep depositors from recognizing the danger and pulling their money out quickly through electronic means. There are banks that hedged against the potential of increased interest rates, but not all. A study in March found that 186 other banks could be tripped up by similar unusually high levels of withdrawals.

A GlobeSt.com examination of various measures of bank deposits shows that falling deposits have been building for some time. The Fed’s H.8 Assets and Liabilities of Commercial Banks data, collected by the Federal Reserve Bank of St. Louis, shows that a long-term increase in bank deposits from 1973 continued up until May 2022. From there until August 2023, deposits have fallen from a record nearly $18.2 trillion to roughly $17.3 trillion, a loss of almost 4.9%, mirroring the FDIC data.

Described as an annual percentage rate change, there have been some spikes in the past during a recession. However, since the rate went negative starting in May 2022, with a slight rebound in July 2023 only to return to the negative in August, this, while not the deepest drop, is the most sustained and the most significant one outside of a recession. The cold shoulder that banks have been showing the CRE industry might keep up for an extended time.