Banking Lost Deposits, But It’s Not Consumers Causing the Leak

National headlines highlighted a drop in deposit levels, but it wasn't because everybody spent the last of their pandemic savings or exhausted their accounts to pay higher prices. A large portion of the industry actually saw small increases. Here's what's behind the numbers.

Headlines can mislead and when you don’t read past the big type, you can miss what really happened. Case in point is the report in early September that U.S. banks lost a “record $370 billion in deposits” in the second quarter of 2022.

Instant assumptions included “all those pandemic stimulus savings balances finally dried up” and “inflationary pricing is emptying people’s savings and banks’ coffers.”

Reasonable conclusions to jump to, perhaps, at least on the surface — but actually not quite what’s been going on, according to a closer look at the numbers.

When FDIC released its “Quarterly Banking Profile” statistical analysis in early September 2022, it noted that bank deposits had fallen for the first time since 2018. They fell $370 billion, 1.9% from the previous quarter. That’s out of total bank deposits of $19.6 trillion as of June 30, to put the decline into some numerical perspective.

Avoiding Sweeping Conclusions:

In spite of the overall drop in deposits, just over half of the banks — 51.2% — reported higher levels over the first quarter.

FDIC reported that most of the decrease came in uninsured deposits, with a small reduction in insured deposits. As a result the industry increased wholesale funding, notably advances from Federal Home Loan Banks, to make up the difference.

“While this reduction slightly offsets the unprecedented growth in deposits reported during the pandemic, total deposits are still well above pre-pandemic levels,” FDIC stated. “As of the second quarter, deposit levels remain elevated at 82.4% of total assets, higher than the pre-pandemic average of 76.7%.”

In fact, in the second quarter, banks with assets of $1 billion and below actually saw a very slight increase in deposits, less than half a percentage point. The quarter-to-quarter falloff appears in institutions over $1 billion, with institutions over $250 billion showing the highest erosion as a group, down 2.6%.

What’s actually going on with retail banking deposits among the major banks, which hold the majority of them?

A Federal Reserve report sheds light on the situation, as do comments by senior executives at the top U.S. banks.

Revisiting the Epic Rise in Deposit Levels

Deposit growth over the last couple of years has been at staggering levels. That’s why the drop drew notice, of course. A Federal Reserve research paper on pandemic-era deposit growth speaks of the expansion exceeding anything seen for three decades. The paper attributes the growth to four factors:

  • At the beginning of the pandemic many companies drew down on credit lines to be able to have cash on hand.
  • To bolster the economy the Federal Reserve began purchasing financial assets.
  • There were substantial government payments to consumers, which often wound up in deposits.
  • The personal savings rate skyrocketed in the early days of the pandemic.

As the Fed’s inflation fight began in earnest, it has been removing deposits from the system by reversing actions taken during the pandemic. This resulted in much of the drop so far.

Nationally, Americans’ savings rate has been falling. It spiked in April 2020, when it hit 33.8%, fell, rose again in March 2021 to 26.6%, and then began falling again, according to the U.S. Bureau of Economic Analysis. By July 2022 the savings rate was down to 5%. (The bureau calculates savings as a percentage of disposable personal income.)

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Bankers’ Views on Consumer Deposit Trends

In late summer meetings with analysts, representatives of top U.S. banks talked about deposit trends, giving some perspective on retail banking depositor behavior. The Financial Brand reviewed what they said.

JPMorgan Chase President and COO Daniel Pinto spoke of the massive increase in retail deposits the company has seen since 2019. Now, he said, “we are not losing deposits, but it has stabilized.” Pinto noted that while rates on retail deposits are up in the market, the repricing pace has been much slower than in past cycles and slower than had been anticipated.

Speaking at the Barclays Global Financial Services Conference, Pinto fleshed out his description of stabilization this way. He explained that savings rates were about half of what they were at the comparable point in 2021.

“Essentially, people are not touching much the accumulation of the wealth that they accumulated over the last couple of years,” said Pinto. Now, however, “they are saving less so they can pay to maintain consumption and to pay for higher prices.” He noted that the bank is seeing consumers revolving more on credit cards, “but the consumer has been in a strong place, they are paying back, and they are being cautious.”

“We lost a bit of deposit in the wholesale space, some related to Russia,” said Pinto. “That’s nothing to do with monetary policy.” Overall, he said, “it’s a very, very good picture on deposits.”

Bank of America’s CFO Alastair Borthwick, noted that many consumer segments still have multiples of deposits they held pre-pandemic.

“That’s particularly true for the very low end of consumers. And the question that we get occasionally is, are you seeing that begin to flow out? The answer is ‘no’,” said Borthwick.

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At Wells Fargo, CFO Mike Santomassimo said consumers are spending down some of the liquidity they have built up, though balances are still relatively stable. He noted that about 60% of the bank’s deposits now come from consumers, an increase from the low-to-mid 40% range of a few years back. At this point he says the more recent deposit arrivals will likely be less rate-sensitive as market rates rise.

However, Santomassimo expects that banks’ “deposit betas” — how much more they are willing to pay for deposits of a given type versus the rise in market rates for such deposits — will eventually rise on the consumer side.

“You know, we’ve hoped for higher rates for how many years? So now we’re getting those higher rates. Not all of it works in our favor, but on a net basis, it works in our favor.”

— Robert Reilly, CFO, PNC

While overall deposit levels are stable, and consumer core deposits are very stable, U.S. Bancorp’s CFO Terry Dolan said that “we expect that our mix will continue to shift from non-interest-bearing to interest-bearing, as people are seeking yield.”

“Consumers continue to have high balances, and deposit balances are still well above pre-Covid levels,” said Andy Cecere, U.S. Bancorp’s CEO. “They’re not growing anymore, but they are still well above 1-3 times pre-Covid levels across all stratifications of deposits.”

Cecere said that credit card spending is 10% over 2021 levels and 30% over pre-pandemic levels. “There is a shift occurring, for sure,” he said. “Discretionary spending is down and non-discretionary spending is up.”

Dolan gave an interesting aside regarding business deposits. He said the bank has detected spending by some companies on inventory to bulk up now, anticipating price inflation.

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