How deposits went from sideshow to center stage in 2023

December 28, 2023 10:58 AM

At most banks, the deposit situation had been fairly quiet in recent years. They racked up customers' money during the pandemic, gaining plenty of liquidity, and didn't have to pay much to keep it.

Heading into 2023, banks faced increasing pressure to pay higher rates to retain deposits, or risk losing them to better-yielding options like money market accounts and U.S. Treasury securities.

That competition, fueled largely by the Federal Reserve's campaign to curb soaring inflation by hiking interest rates, meant that more banks were opting to reprice deposits, and their funding costs were rising. In some cases, banks began paying attractive rates on digital savings accounts. In other cases, they started tying annual bonuses to deposit-gathering.

Then came the spring banking crisis, which put deposits front and center. California-based Silicon Valley Bank, which built its business around serving the startup sector, failed after experiencing a deposit run — including an outflow of $42 billion in one day. Three days later, Signature Bank in New York collapsed, also as a result of a bank run.

For the rest of the year, deposit trends had an outsize impact on the U.S. banking industry. Here's a recap of key developments involving deposits in 2023.

Lauren Justice/Bloomberg

Deposit outflows cripple certain banks

Some banks with a concentration of startup and technology clients, similar to Silicon Valley Bank but to a lesser degree, found themselves in trouble by association. Spooked by the notion that more banks would fail, customers began yanking their deposits out of certain banks and putting them elsewhere.

First Republic Bank in San Francisco experienced a slow bleed, which came to an end in May when it was acquired by JPMorgan Chase, the largest U.S. bank by assets. Days before the deal came together, First Republic reported losing more than $100 billion of deposits during the first quarter of 2023, excluding the $30 billion of deposits that big banks pumped into the company to stabilize its balance sheet and instill confidence in the industry.

PacWest Bancorp in Los Angeles was another beleaguered West Coast bank impacted by deposit runoff and market volatility after SVB's collapse. The $44 billion-asset company reported losing $6 billion of deposits during the first quarter. In July, after months of struggle, PacWest made a deal to be bought by Santa Ana-based Banc of California.

Western Alliance Bancorp in Phoenix was also hit hard as its customers pulled out deposits. The situation stabilized as its executives reassured clients about the company's balance sheet and business model, and the pace of outflows eased.

During the first quarter of the year, deposits had fallen to $47.6 billion, representing a year-over-year decline of 8.8%. In the third quarter, deposits were still down year over year, but only by 1.3%.

Winners emerge as customers seek safety

Where exactly all of the deposits from Silicon Valley Bank and other banks would land was a hot topic over the spring and summer. By and large, the nation's biggest banks were viewed as safe havens, but experts said that it would be hard to know for sure which deposits would go where and for how long.

Still, it was clear that JPMorgan was a large beneficiary. The company has declined to say how many deposits from startup companies it has added since March, but Melissa Smith, co-head of JPMorgan's innovation economy segment, said this fall that there was a "significant inflow of clients," especially in the early days of the upheaval.

Experts said that some of the money that flowed out of SVB and other failed banks — and into other banks and investment facilities — might flow right back out.

Indeed, cash held by U.S. startup businesses — much of it previously held as deposits at SVB — scattered widely after the bank's collapse, according to a study this year by Kruze, an accounting consulting firm with more than 800 startup clients.

Banks continue to vie for funding amid rate hikes

While bank failures caused a great deal of deposit movement, they weren't the only culprits. The upheaval was also a function of how much banks were willing to pay to attract and retain funding.

Even before the spring crisis, some big banks were paying up for certain online deposits as a result of the Fed's aggressive interest hikes. PNC Financial Services Group, BMO Financial Group and Citigroup were among the larger banks that were paying interest rates around 4% on digital savings accounts for customers who live outside each banks' branch footprint.

At the same time, certificates of deposit became a viable interest-earning option, as banks competed to retain deposits and lock in funding for several months. The decision to pay higher rates for CDs helped some banks rebuild their deposit bases after declines earlier in the year.

Wealth management deposits were a vulnerability for some banks. Such deposits fell amid the intense competition from alternative investments and rival banks. According to a June 2023 report from Curinos, weekly deposit outflows from wealth management accounts were running at twice their rate before the failures.

Toward the end of the year, bankers reported that deposit cost pressures were easing, in part because the Fed is now expected to cut rates in 2024. But analysts said banks aren't out of the woods just yet, as the Fed will likely reduce rates slowly.

The FDIC moves to replenish the Deposit Insurance Fund

One debate that became more intense after the spring bank failures: Which banks would be required to help replenish the Federal Deposit Insurance Corp.'s Deposit Insurance Fund, and how much funding would they have to contribute?

The DIF had been a topic of concern for the FDIC even before any of the bank failures. The agency had already approved increases to deposit insurance premiums — the FDIC insures all deposits under $250,000 — based on the influx of deposits banks received during the pandemic.

But following the failure of First Republic in early May, the DIF was down about $35 billion on the year. The FDIC needed to pass those costs onto banks.

Industry lobbyists and advocates raised concerns about the cost and fairness of a special assessment fee, which was finalized in November. According to the final rule, 114 banks will pay an annual rate of 13.4 basis points, or a quarterly rate of 3.36 basis points over eight quarterly assessment periods.

The rate will be applied to the 114 banks' assessment bases, equal to their uninsured deposits over $5 billion. The FDIC will begin collecting the funds during the first quarterly assessment period of 2024.