Capital Flight, Regs Channel Deposit Flows to Big Banks

Deposit growth has been robust across the industry, raising issues about what to do with the cash at both large banks and small banks.

But the increase has been considerably stronger at large banks, which receive most of the flows generated by tidal shifts in money markets, and have been impelled to shore up core funding by regulation (see charts).

In the most recent flight-to-liquidity episode, deposits at the 25 largest commercial banks with domestic charters jumped 4% from June 1 to July 20, to $4.5 trillion, according to estimates from the Federal Reserve. Among the rest of the industry, deposits increased a little less than 1%, holding at about $3.5 trillion during the same time.

A similar pattern appeared at the height of the financial crisis, when large banks experienced a 13% increase in deposits from early September 2008 through the end of that year, compared with a 3% increase among small banks.

Meanwhile, large banks have outpaced small banks in rebalancing toward core deposits, or deposits excluding time accounts with balances of $100,000 or more.

Large banks have traditionally relied on wholesale markets for a greater proportion of their funding than small banks. But the low-rate environment and a preference for cash among savers has made it easy for them to narrow the gap as regulators push for core accounts, which are typically more stable during a crisis.

(In addition to new liquidity standards designed by international policymakers, the move to tie deposit insurance assessments to asset size has helped propel the tilt.)

Core deposits as a percentage of assets increased 14 percentage points from late 2007 to 60% in late July at large banks. During the same time, the ratio increased 10 percentage points to 65% at small banks.