All Eyes Are on Bank Deposit and Liquidity Risks

Bank leaders are working overtime to defend their performance and relevancy.

The historic deposit runs on several niche regional banks have woken up bankers and their investors, regulators and policymakers to the threats that liquidity flows place on the entire industry. Taking a step back and looking into reported financial data for Q1 2023, a few key insights appear:

The banking industry lost a remarkable $1.1 trillion or 5.5% of total deposits from March 31, 2022, to March 31, 2023 – obviously, a pace that is dangerous to liquidity if it continues. Where did the money go?

• Spending vs. Savings – The U.S. personal savings rate declined to levels not seen since the Great Recession 15 years ago. When COVID-related financial support stopped, consumers sopped up some of their savings in spending.
• Money Market Funds – With consumers waking up to the differential between bank rates and rates in treasuries, a stunning $469 billion flowed into money market mutual funds in Q1 2023. The average cost of funds at banks in the first quarter of 2023 was 1.38% at a time when the 90-day T Bill hovered between 4.5% and 5.0%.

Interestingly, even with these outflows, bank deposits are still markedly higher than they were when the COVID crisis began and liquidity flooded into the industry.

Most of the panicked headlines seem to indicate that funds have been flowing freely from small banks into too-big-to-fail players. However, here are a few counterintuitive data points:

• While banks in the $50 billion to $250 billion range (SVB, Signature, First Republic, Zions, Western Alliance) had huge outflows, the greatest amount of deposit outflow came from the largest banks over $250 billion.
• Banks $10 billion and under have actually grown deposits in the past year!

For the regional banks, a combination of major failures coupled with large businesses moving money for risk management and investment purposes remains the major cause of deposit outflows. Retail and small business deposits do not appear to be major sources of outflow.

For the large banks, the factors of reduced personal savings and flows into higher-yielding treasury investment and bank offerings are likely why funds are flowing out.

Given that deposit risk has primarily been centered around large accounts and uninsured exposure, it may be no surprise that credit unions have done quite well through this crisis in retaining consumer deposits. Because less than 9% of their deposits are uninsured, members of credit unions are more at risk of moving for yield vs. moving for safety and soundness concerns.

Going forward, Cornerstone sees banks working overtime to preserve their deposits and essentially manage liquidity risk on a daily basis. Key actions leaders should be taking include:

• Working on a “white glove” basis with large depositors to increase insurance coverage through IntraFI or sweep some balances into investment accounts
• Analyzing data to optimize deposit pricing, gradually closing the gap between bank rates and treasury rates to discrete “indifference pricing” for distinct customer sizes and segments
• Developing deposit product offerings and gearing up marketing to play offense with deposit growth while holding a defensive line on deposit retention
• Managing external public, investor and regulatory communication to ensure confidence is maintained and no situations get overblown in a social-media-powered economy

The massive influx of deposits after COVID tended to lull the banking industry into a slumber when it came to liquidity, just in time for a historic shift in rates that shook the walls of all banks. Now liquidity is the lifeblood of banking and leaders are working overtime to defend their performance and relevancy in a new financial world.