Top US lenders to share deposit flight

US banks are set to reveal this week that customers have withheld tens of billions of dollars in deposits despite gaining new customers after the collapse of Silicon Valley Bank in March 2023. Analysts estimate that nearly $100bn was pulled out of money market funds like JPMorgan, Bank of America, Citi and Wells Fargo in the first three months of this year. This happened despite customers shifting deposits from smaller regional banks to larger banks, such as JPMorgan and BOFA, following the failures of SVB and Signature Bank in March.

Deposits are usually the cheapest source of funding for banks, so any shortfall in them can constrain lending. The big banks have been steadily losing deposits over the past year as the Federal Reserve raised rates. Analysts expect banks with large retail operations, such as JPMorgan, BOFA, Citi and Wells, to see the most revenue growth. However, investment banking is expected to face another challenging quarter as Wall Street deals with a prolonged slump that Goldman and Morgan Stanley are predicted to hit the hardest.

Prior to the collapse of SVB and Signature, deposits were flowing out of the banking system and into higher-yielding assets like money market funds because many banks were not passing on the higher rates to depositors. This boosted profit margins from lending but the withdrawals pressured banks to raise their “deposit beta”. If rates remain high, banks will either have to operate from lower levels of deposits or offer higher rates to customers. The rush to safety by customers following the collapse of SVBs is expected to partially offset deposit flights in large banks during the first quarter.

However, any increase in deposits for big banks could prove short-lived, unless they offer higher rates to compete with rival savings products such as money market funds. According to Scott Siphers, banking analyst at Piper Sandler, bank management teams “won’t be Pollyanna-ish and think all this money is going to be permanent”. Adding to investor concerns is the proportion of deposits that lenders invested in long-term securities such as US Treasuries and mortgage-backed securities when interest rates were low. It was this investment strategy that, in large part, resulted in the end of SVB.