Why Are Banks Losing Deposits?

The total deposit in U.S. banks decreased by $370 billion in the second quarter of 2022. This statement is accurate. But the statement by itself does not point to any obvious patterns or reasons behind the phenomenon. This is because the amount represents only 1.9% of the total bank deposit of $19.6 trillion. It might be tempting to think that the savings made during pandemic running out or expenses are currently rising. But this view does not account for the nuances in the actual data.

Broad Assumptions Can Be Misleading

While there has been a decrease in total deposits, the amount is still significantly higher (82.4% of total assets) than the pre-pandemic baseline (76.7% of total assets). In fact, more than half of the banks saw an increase in their deposits as compared to the first quarter of 2022. Decreased savings and inflation of prices, cannot possibly explain this growth in deposits of these banks. Breaking down the deposits by the assets of the banks shows another interesting trend. Banks with $1 billion in assets or below had an increase in deposit. Decrease was slight in banks with assets over $1 billion and very high in banks with over $250 billion. So the main contributors of the decrease were major banks with retail banking deposits.

Role of Increased Deposits

The decrease in deposits seems like a large change that deserves to be explained as it comes after a period of unprecedented growth in deposits. There are many reasons for the growth of deposits during the pandemic. These include the following:

  • Increase in personal savings rate
  • Companies drew on credit to maintain liquid cash
  • Government payouts
  • The purchase of financial assets by the Federal Reserve

All these caused inflation which the Fed tried to correct after the Pandemic. So it removed most of its deposits from the banking system, resulting in the decrease.

Perspective Of Bankers

The data points to nuanced and complex reasons behind the decrease in deposits. This is reflected in the diversity of opinions of the bankers. Some think that banks are not losing deposits. Instead, the deposit levels are stabilizing to a new average. They also think that people are not withdrawing from the savings they made during the pandemic. Instead, they are saving at a reduced pace to keep up with expenses. Others also think that decrease in deposits in the wholesale space can partly be attributed to Russia.

The article was authored by Bahaa Abdul Hussein and has been published by the editorial board of the Fintekdiary. For more information please visit www.fintekdiary.com

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