Who’s Growing Deposits? Da Brokers Are!

Do you hear a giant sucking sound around your teller line? It may be the brokerage industry taking the liquidity and lifeblood from the banking industry. Many bankers may not have seen the shocking statistics lately. Brokerage houses that own banks are having a field day with deposit growth, right at a time when traditional banks can’t seem to buy a checking account. Here’s the hard facts:

• From September 30, 1999, to September 30, 2000, Merrill Lynch funneled a whopping $33 billion into insured money market accounts through its two banking subsidiaries!
• Merrill Lynch’s deposit growth represented a full 30% of all money market growth in the entire banking industry during this period.
• Other smaller players are beginning to have similar luck. E*Trade Bank grew deposits $2.5 billion during the same period, while TD Waterhouse grew $1 billion.

The $37 billion in money market deposit growth that these three players generated in ONE YEAR is nearly twice as much as all the money market deposits held by all commercial banks under $100 million. (These 5,000 institutions hold $21 billion in money market deposits – brokers are running right over these small guys.)

• This “Hoover vacuum” of disintermediation continues. E*Trade Bank recently announced that it had grown deposits another $1 billion during the fourth quarter of 2000. E*Trade’s small upstart bank has quickly grown to $9 billion. It won’t be long before other brokers follow suit, using the customer appeal of a brokerage/money market product combination and dirt cheap deposit insurance to beat banks at their own game.

Although regulators may try to adjust deposit insurance rates for these new liquidity carpetbaggers, banks have a serious strategic problem. Somehow, banks have to better match the convenience, integration and competitive return of a brokerage package tied to an insured money market account. We need to move to “Defcon 4” on the bank liquidity crisis. -sw