By Naveen Athrappully
Uninsured deposits at American banks fell by almost $600 billion in the first quarter of 2023, continuing the trend of declining deposits that began last year, suggesting a fall in depositors’ confidence in the banking system.
“US banks’ uninsured deposits have fallen since the first quarter of 2022, by both the dollar amounts of uninsured deposits and the percentage of total deposits. The latest quarter-over-quarter drop was the steepest yet,” states a June 12 S&P Global Market Intelligence report.
As of March 21, uninsured deposits at banks amounted to $7.118 trillion, down $597.49 billion, or 44.9 percent, from Dec. 31. Compared to a year ago, deposits are down 47 percent.
An uninsured deposit refers to deposits exceeding the $250,000 deposit insurance limit of the Federal Deposit Insurance Corporation (FDIC).
The “steepest” quarterly deposit decline came amid a banking crisis triggered by the failure of Silicon Valley Bank (SVB) in early March. This put massive pressure on banks, sparking worries that more banks would be at risk of failure. SVB’s shutdown was followed by the collapse of Signature Bank.
Unlike insured depositors, uninsured depositors can lose part of their deposits if the bank fails. This gives uninsured depositors an incentive to withdraw their funds in case of any indication of bank or economic stress.
Out of the 25 banks holding at least $25 billion in assets, 20 of them reported a quarter-over-quarter decline in uninsured deposits, according to S&P Global.
Among the Big Four banks, only JPMorgan Chase reported an increase in uninsured deposits with a 1.9 percent hike. S&P Global attributed this to JPMorgan Chase’s acquisition of First Republic Bank.
The remaining three of the Big Four banks—Citigroup, Wells Fargo, and Bank of America—all reported a drop in uninsured deposits.
Among the banks analyzed by S&P Global, the biggest quarterly drop in uninsured deposits was registered by BankUnited at 28.6 percent.
“First-Citizens Bank & Trust Co. Inc. posted the largest quarterly increase as its uninsured deposits more than doubled following its acquisition of all customer deposits and certain other liabilities of Silicon Valley Bridge Bank,” the report said.
Impact of Fed Rate Hikes
While uninsured deposits saw a decline in Q1, the opposite trend was visible among insured deposits, according to a Q1 Quarterly Banking Profile report (pdf) by the FDIC.
Total deposits fell by $472.1 billion, or 2.5 percent, between Q4 2022 and Q1 2023 according to an FDIC analysis, which it calls the “largest reduction reported” in Quarterly Banking Profile since 1984.
A $663.3 billion reduction in uninsured deposits was the “primary driver” of the quarterly decline in total deposits. On the contrary, estimated insured deposits grew by $255.1 billion during this period, it noted.
The decline in deposits is also related to rising Fed rates. In a June 11 Twitter post, Jim Bianco, the president of Bianco Research, noted that approximately $1.4 trillion has left deposit accounts since March 2022 when the Federal Reserve announced its first rate hike of the current cycle.
Out of the $1.4 trillion, $900 billion went into money market funds while $500 billion went to certificate of deposits.
“The hiking cycle opened up the largest spread between money market and deposit rates since bankrate.com started measuring this in 1998,” he pointed out.
“It is rationale for many to keep leaving banks. It is irrational to say ‘things are stabilizing’. That suggests 450 basis points of yield is no longer interesting to depositors. That makes no sense. The ‘bank walk’ continues.”
Surging Time Deposits
According to a June 5 analysis by research firm Risk Quantum, time deposits at 22 American banks shot up by almost a third in the first quarter this year, contrary to the widespread trend of falling deposits. Time deposits are bank deposits that are locked for a fixed time period.
While overall deposits dropped by 2.6 percent, deposits held for a fixed time period surged by 32 percent, according to the analysis.
In the 14 smaller banks, time deposits rose by 36.5 percent. Though time deposits have been rising over the past year, they saw a massive spike in Q1 2023, Risk Quantum noted.
The firm estimates that the move to boost time deposits by banks is likely a response to the liquidity scare facing the industry. As time deposits would remain for a fixed time period, they cannot be withdrawn as easily as demand deposits.
However, time deposits present a major risk to the banks because they have higher interest rates. As such, if the general interest rates were to fall, then the higher interest rate on time deposits could be a financial challenge to these institutions, the firm noted.