Depositors withdrew an additional $126 billion from US banks in the week ended March 22, according to new Federal Reserve data. This time the outflow came from the country’s largest institutions.
According to the Fed, the 25 largest banks lost a seasonally adjusted $90 billion. The smaller banks, which suffered massive withdrawals over the past week as regulators seized regional lenders Silicon Valley Bank and Signature Bank, have been able to stabilize their outflows. On a seasonally adjusted basis, they actually recovered $6 billion.
Total industrial deposits fell to $17.3 trillion, down 4.4% from the same week a year ago. This is the lowest level since July 2021.
The new numbers reinforce some trends that were already there. Before the collapse of Silicon Valley, deposits at all banks had been falling for the first two months of the year. Deposits from all banks also fell by 5% annually in the fourth quarter of 2022.
Many observers attribute this industry-wide shift to pressure from an aggressive Federal Reserve campaign to curb inflation.
At the start of the pandemic, when interest rates were historically low, banks were flooded with deposits. As the Fed began raising those rates to cool the economy, customers with depositors looked for places with higher yields. The first year-on-year drop in deposits across all banks occurred in the second quarter of 2022.
Some of this money goes into money market funds. Since early January, investors have poured $508 billion into these funds, the highest quarterly inflow since a peak earlier in the pandemic, according to a Bank of America research note. Another $60 billion was added to these assets over the past week.
Government and industry officials have been working to avert massive outflows of deposits following March’s bank failures. Regulators vowed to protect all depositors at both banks they seized in hopes that would calm any panic, and also pledged to help other regional banks if needed. Eleven giant banks also decided to provide $30 billion in uninsured deposits to a troubled regional lender, First Republic, to stabilize its situation.
The story goes on
The challenge that deposit outflows pose for all banks is that they could become less profitable if they raise interest rates on their deposits to keep customers. But if they lose too many customers, as Silicon Valley Bank did, they will forgo critical funding and may have to sell assets at a loss to cover withdrawals.
Silicon Valley Bank’s customers withdrew $42 billion in one day, leaving the bank with a negative cash balance of $958 million. That forced regulators to seize the bank, which was the 16th largest in the US
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