Depositors withdraw 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 influx came from the largest state institutions.

The 25 largest banks lost $90 billion on a seasonally adjusted basis, according to the Federal Reserve. Smaller banks, which had suffered huge drawdowns in the previous week as regulators took control of regional lenders Silicon Valley Bank and Signature Bank, managed to stabilize their outflows. They’ve already brought 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. This is the lowest level since July 2021.

The new numbers reinforce some trends that were already in place. Deposits were falling across all banks before the Silicon Valley crash, falling in the first two months of the year. Deposits of all banks decreased by 5% annually in the fourth quarter of 2022.

Many observers attribute this industry-wide shift to pressure from the Fed’s aggressive inflation-lowering campaign.

During the early part of the pandemic, when interest rates were historically low, banks were overwhelmed with deposits. When the Fed started raising these rates higher to cool the economy, customers with deposits started looking for places with higher returns. The first decline in deposits on an annual basis for all banks came in the second quarter of 2022.

Some of that money flows into 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 the earlier peak of the pandemic. Another $60 billion was added to these assets in the past week.

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Government and industry officials are working to prevent massive outflows of deposits in the wake of the March bank failures. The organizers pledged to cover all depositors at both banks who were seized, hoping to quell any panic, and also promised to help other regional banks if needed. Eleven giant banks have also decided to provide a distressed regional lender, First Republic, with $30 billion in uninsured deposits to stabilize its situation.

The challenge that deposit outflows create for all banks is that if they raise interest rates on their deposits to keep customers, that could make them less profitable. But if they lose too many customers, as the Silicon Valley bank did, they forgo important financing 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 take over the bank, which was ranked 16th in the US

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