Shocking Decrease: The US Banking System Bleeds Billions in Deposits

According to statistics from the Federal Reserve (Fed), the US banking system has witnessed a significant decrease in deposits since the beginning of January.

According to statistics from the Federal Reserve (Fed), the US banking system has witnessed a significant decrease in deposits since the beginning of January. A staggering 371 billion USD has exited the system during this period. Conversely, money market funds have experienced a substantial influx of more than 769 billion USD. These figures highlight a growing trend of investors seeking alternative avenues to park their funds.

This week, money market funds have reached an all-time high in terms of assets flowing into them. The allure of attractive interest rates above 5% acts as a magnet for investors, especially given the Fed's determination to keep interest rates at elevated levels for an extended period. Such a scenario presents a challenge for banks that are already struggling to retain depositors, especially after witnessing the collapse of three mid-sized banks earlier this year.

The decline in deposits and the increase in money market funds have been a continuous trend since the start of the year. Although the outflow from the banking system slowed over the summer, major banks have still experienced a decline in deposits since the end of June. The wealthiest customers pose the biggest risk, as wealthy clients and corporate clients' deposits have witnessed a nearly 13% decline in the first seven months of this year, in comparison to the overall decline of just 1.8%.

In addition to the challenge of retaining wealthy customers, banks are also grappling with high interest rates, rapidly increasing borrowing costs, and eroding profits. Recent weeks have seen credit rating agencies such as Moody's and S&P Global lowering the credit ratings of several mid-sized banks. Larger banks face pressure from regulators to increase capital and, in some cases, issue longer-term bonds as backup. Moreover, the rising credit card debt and a surge in bad debt ratios could lead to substantial losses in the near future.

The banking industry has already felt the impact of these challenges, with banking stocks experiencing their worst month since March. The KBW Nasdaq Bank index fell by 8% and the KBW Nasdaq Regional Bank index, which includes regional banks, fell by 9% at the end of August. The pressure on banks can be traced back to 2022 when the Fed implemented measures to cool inflation by pushing interest rates to skyrocket. This resulted in a plummet in the value of bonds held by banks and forced financial institutions to raise interest rates to attract and retain depositors, consequently eroding their profits and increasing liquidity risks.

Silicon Valley Bank, Signature Bank, and First Republic are some notable examples of banks that collapsed as depositors rushed to withdraw their money. In a recent report, S&P commented on this trend, stating, "Many depositors have switched to high-interest accounts, significantly increasing banks' mobilization costs. Falling deposits threaten the liquidity, as well as the stock and bond prices of many banks."

Deposits at banks insured by the Federal Deposit Insurance Corporation (FDIC) saw a decline of 2.5% in the first quarter, marking the sharpest quarterly decline since 1984. Banks not insured by the FDIC experienced an even sharper decline of 8.2% during the same period. Initially, major banks benefited from the crisis at regional banks as depositors sought safer havens. However, the tide quickly turned, and customers gravitated towards smaller banks offering higher interest rates or money market funds.

The asset management segments of major banks like JPMorgan Chase, Wells Fargo, Bank of America, and Citi witnessed significant withdrawals in the second quarter. JPMorgan and Wells Fargo experienced an 11% decrease, far higher than in previous periods. To counter this trend, in mid-August, these major banks issued short-term certificates of deposit with higher interest rates. For instance, JPMorgan Chase's 6-month certificate of deposit offers an interest rate of up to 5% per year. This places immense pressure on smaller banks that lack the resources to launch similar competitive policies.

In conclusion, the US banking system is facing a challenging time as deposits continue to decline, while money market funds attract substantial inflows. High interest rates, increasing borrowing costs, eroding profits, and credit rating downgrades contribute to the mounting pressures on banks. The aftermath of the recent economic crisis has undoubtedly reshaped the landscape of the banking industry.