Blog on Stall in Bank Deposit Growth
Analyst Adam Josephson asks in his new "As the Consumer Turns" blog, "What Happened to the Growth in Bank Deposits?" He tells us, "In my last post I wrote about U.S. banks' loan trends, specifically the disproportionate amount of lending going to levered nondepository financial institutions (NDFIs) as opposed to real economy borrowers (meaning households and businesses). This time I'll focus on their deposit trends. From 2018 to February 2020, deposit growth averaged 4-5%, considerably below the 2000-2017 rate of 7.2% but nonetheless much better than what followed the pandemic spike.... [A] historic amount of government stimulus spending led to an unprecedented increase in bank deposits, from $13.3 trillion in February 2020 to $18 trillion by the end of 2021." He explains, "When the Fed started reducing its asset holdings in mid-2022 via its quantitative tightening (QT) program, bank deposits fell for the following year, from $18 trillion to just over $17 trillion. They've since recovered to just over $18 trillion, effectively unchanged versus three years ago. Deposits began growing on a year-over-year basis last March, but the average growth rate has only been around 2%, far lower than the historical growth rate. Just as bank loan growth has been unusually weak over the past two years (even with booming lending to NDFIs), so too has deposit growth. What explains the latter? Likely to a significant extent, QT and the growth of money market funds (MMFs). Just as QE created deposits, QT has done the opposite." Josephson's tells us, "MMFs have grown rapidly over the past few years. Money is a commodity, and as such it often goes whenever institutions and retail can earn the most attractive rates. And the rates on MMFs are far more attractive than what banks are paying on savings accounts. The Crane 100 Money Fund Index’s 7-day yield as of March-end was 4.15%, compared to the Crane Brokerage Sweep Index's yield of just 0.41%. Per the FDIC, the national deposit rate on savings accounts is an identical 0.41%. For any yield-sensitive institution or retail investor with the ability to move excess funds, the choice seems clear."
