The collapse of SVB and other banks triggered a deposit flight
The US banking sector is facing a serious challenge as customers are withdrawing their deposits from regional and mid-sized banks, following the collapse of Silicon Valley Bank (SVB) and other lenders in early 2023. SVB, which had over $100 billion in assets, failed due to its exposure to risky loans and investments in the tech sector. The bank’s demise sparked a panic among its customers, who rushed to withdraw their uninsured deposits, exceeding the $250,000 limit covered by the Federal Deposit Insurance Corporation (FDIC).
The deposit flight also affected other regional banks, such as Signature Bank and First Republic Bank, which had similar business models and customer segments as SVB. These banks, which cater to affluent individuals and commercial clients, saw their deposits shrink by billions of dollars in a matter of weeks. The loss of deposits not only reduced their liquidity, but also increased their funding costs, as they had to rely more on wholesale sources and offer higher interest rates to attract and retain customers.
Regional banks are losing deposits to money market funds and large banks
According to JPMorgan, around $1 trillion in deposits have been withdrawn from the “most vulnerable US banks” since the Federal Reserve began raising interest rates in March 2022. Half of that amount came out after SVB blew up about two weeks ago. The bank’s global markets strategy team, led by Nikolaos Panigirtzoglou, said that the deposit outflows were more pronounced from commercial and affluent client segments, compared to retail deposits.
The main beneficiaries of the deposit outflows are money market funds and large banks, which are perceived as safer and offer better yields. Money market funds, which invest in short-term debt instruments, have seen their assets surge by $286 billion in the past two weeks, reaching a record high of $5.7 trillion. Large banks, which have more diversified businesses and stronger capital positions, have also gained deposits from customers who are looking for stability and convenience.
Regional banks face higher funding costs and lower lending capacity
The deposit outflows have significant implications for the regional banks’ profitability and growth prospects. Deposits are the main source of funding for these banks, which use them to make loans and generate income from the interest rate spread. As deposits decline, regional banks have to pay more for alternative sources of funding, such as borrowing from other banks or issuing bonds. This reduces their net interest margin, which is the difference between the interest income they earn and the interest expense they pay.
Moreover, as deposits shrink, regional banks have less capacity to lend to their customers, especially households and small businesses, which rely heavily on bank credit. This could create a credit crunch that puts the US economy at risk of recession, as the Federal Reserve Chairman Jerome Powell warned last week. Powell said that the uncertainty generated by deposit movements could cause banks to become more cautious on lending, and that the central bank was closely monitoring the situation.
Regional banks need to improve their deposit gathering and retention strategies
To survive the deposit crisis, regional banks need to adopt more effective deposit gathering and retention strategies. They need to offer more competitive and innovative products and services that meet the changing needs and preferences of their customers. They also need to leverage data analytics and customer insights to identify the types of deposits that are at risk of attrition and to design targeted interventions to prevent them from leaving. Additionally, they need to enhance their brand reputation and customer loyalty by emphasizing their value proposition and differentiating themselves from their competitors.
Regional banks that have strong fundamentals and sound business practices can overcome the current challenges and emerge stronger. However, they need to act fast and decisively to restore their deposit base and regain their customers’ trust and confidence.
