Bank Deposits Down for 5th Consecutive Quarter in Q2

Deposits within the realm of Federal Deposit Insurance Corp. (FDIC)-sanctioned banks have sustained a relentless decline, marking the fifth consecutive quarter of diminishment, according to the FDIC’s most recent Quarterly Banking Profile. Simultaneously, net income has taken a substantial hit, registering a double-digit decrease in the same quarter.

The report reveals that total deposits across the extensive network of over 4,600 FDIC-insured banks have shrunk by a substantial $98.6 billion during the second quarter, following a staggering plunge of $472 billion in the preceding quarter, amidst the tumultuous banking landscape that has characterised the year. Notably, the second-quarter contraction represents the most significant quarterly downturn on record.

In tandem with the deposit slump, the industry’s net income has ebbed by $9 billion, constituting an 11.3% reduction, thereby settling at $70.8 billion for the quarter concluding on June 30. This stark decline stands in stark contrast to the preceding quarter’s peak of nearly $80 billion. Notably, the average net interest margin, a pivotal metric in gauging profitability for U.S. banks, has experienced a 3-basis point contraction, diminishing to 3.28%, following a prior 7-basis point dip in the first quarter.

This disconcerting trend in deposit contraction primarily stems from uninsured deposits, which are those exceeding the FDIC’s insurable limit of $250,000. During the second quarter, uninsured deposits saw a decrease of $180.6 billion, marking a 2.5% reduction, albeit following a massive drop of over half a trillion dollars in the preceding quarter. It is imperative to underscore that uninsured deposits played a pivotal role in precipitating this year’s banking crisis, given that the institutions that succumbed to this crisis—Silicon Valley (SVB), Signature, and First Republic—possessed the highest exposure to uninsured deposits relative to their total deposits.

Conversely, insured deposits witnessed a resurgence in the second quarter, surging by almost $85 billion, equating to a 0.8% rise compared to the previous quarter. The overall decline in total deposits was partially mitigated by an uptick in wholesale funding. Wholesale funding, which encompasses the issuance of loans for financial instruments such as Treasury bills, commercial paper, and certificates of deposit (CDs), witnessed an increase of $80 billion, marking a 1.5% expansion from the previous quarter.

These findings underscore the banking industry’s ongoing convalescence from the turbulence that marred the earlier part of this year. Nevertheless, it is important to recognise that the sector has become less exposed to some of the riskiest deposits that have the potential to catalyse future crises.

FDIC Chair Martin Gruenberg, commenting on the results, stated in a press release, “Despite the period of stress earlier this year, the banking industry continues to be resilient.”