WSJ Says Bank Deposits Could Drop
The Wall Street Journal writes that "Bank Deposits Could Drop for First Time Since World War II." The piece says, "U.S. banks have a streak of increasing deposits as a group every year since at least World War II. This year could break it. Over the past two months, bank analysts have slashed their expectations for deposit levels at the biggest banks. The 24 institutions that make up the benchmark KBW Nasdaq Bank Index are now expected to see a 6% decline in deposits this year. Those 24 banks account for nearly 60% of what was $19 trillion in deposits in December, according to the Federal Deposit Insurance Corp. While some analysts doubt the full-year decline will happen, even the possibility would have been unthinkable a few months ago. Bank deposits have grown sharply during the pandemic." The Journal tells us, "Banks were supposed to benefit from a slow and methodical increase in interest rates. That would allow them to charge more on loans and keep near zero the amount they pay depositors. Banks, after all, won't pay more for funding they don't need. That combination would boost what had been record-low profit margins. The last time the Fed increased rates, deposit growth slowed but was still positive, so bankers expected the same. But what happened the past two years to set the stage for this year has no precedent. During the pandemic, consumers stashed away stimulus checks and businesses stockpiled cash to deal with shutdowns and supply-chain issues. Total deposits increased $5 trillion, or 35%, over the past two years, according to FDIC data." They explain, "Analysts and bankers think those aren't likely to stay around. Citigroup estimated banks have $500 billion to $700 billion in excess noninterest-paying deposits that could move quickly. The most likely beneficiaries are money-market funds, short-term investments that often capture overflowing deposits from banks. Historically, consumers and businesses have been slow to move most deposits out of banks to chase interest rates. But the sheer volume of excess cash floating around could change that behavior, especially if the Fed moves rates faster than it usually does. The Fed is now expected to boost interest rates by half a percentage point at its next meeting, instead of the typical quarter percentage point increase." The article adds, "The money-market funds started parking the overflow at a newer program at the Federal Reserve Bank of New York for short-term storage. That program, known as the reverse repo, has about $1.7 trillion in it now after being mostly ignored since its 2013 creation. Because it is so new, and suddenly so big, bankers and analysts have been unsure what will happen with those funds as the Fed started moving rates. For months, many viewed them as excess funds that would follow the general idea of 'last in, first out.' Now, some analysts are reversing that theory. They expect money-market funds to march their rates higher along with the Fed, which would keep them more attractive than bank deposits. The average rate on savings accounts stood at roughly 0.06% on March 21, according to the FDIC, compared with 0.08% for money-market accounts. Savings account interest rates aren't expected to move much until loan demand and deposit levels come back into balance. Demand for the New York Fed program has increased in recent weeks as expectations for bigger Fed hikes have emerged, said Isfar Munir, U.S. economist at Citigroup."
