Depositors yank another $126 billion from US banks

Depositors drained another $126 billion from US banks during the week ending March 22, according to new Federal Reserve data. This time the outflow came from the nation’s largest institutions.

The biggest 25 banks lost $90 billion on a seasonally adjusted basis, according to the Fed. The smaller banks, which suffered massive withdrawals the previous week as regulators seized regional lenders Silicon Valley Bank and Signature Bank, were able to stabilize their outflows. They actually gained back $6 billion on a seasonally adjusted basis.

Total industry deposits fell to $17.3 trillion, down 4.4% from the same week a year ago. That is the lowest level since July 2021.

The new numbers reinforce some trends that were already in place. Deposits had been declining at all banks before the Silicon Valley failure, falling each of the first two months of the year. Deposits for all banks were also down 5% annually in the fourth quarter of 2022.

Many observers attribute this industrywide shift to pressure being applied by an aggressive Federal Reserve campaign to lower inflation.

During the early part of the pandemic, when interest rates were historically low, banks were awash in deposits. When the Fed began moving those rates higher to cool the economy, customers who had deposits began seeking out places with higher yields. The first year-over-year deposit decline for all banks came in the second quarter of 2022.

Some of this money is flowing to money market funds. Since the beginning of January, investors have poured $508 billion into those funds, according to a research note from Bank of America, the highest quarterly inflow since a peak earlier in the pandemic. Another $60 billion was added to these assets in the past week.

Government and industry officials have been working to prevent massive deposit outflows in the aftermath of March’s bank failures. Regulators pledged to cover all depositors at both banks they seized, hoping that would calm any panic, and also promised to help other regional banks if needed. Eleven giant banks also decided to provide one troubled regional lender, First Republic, with $30 billion in uninsured deposits to stabilize its situation.

The challenge the deposit outflows create for all banks is that if they raise rates on their deposits to keep customers, that could make them less profitable. But if they lose too many customers, as Silicon Valley Bank did, they give up critical funding and may have to sell assets at a loss to cover withdrawals.

Silicon Valley Bank customers withdrew $42 billion in one day, leaving the bank with a negative cash balance of $958 million. That forced regulators to size the bank, which was the 16th largest in the US

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