Increased deposit levels at big banks — the effect of a perceived flight to safety by some depositors — could reduce the megabanks' first-quarter net interest margins.
Some bank customers spooked by industry turmoil in recent weeks have moved their money from smaller, regional banks to larger ones that are often regarded as "too big to fail."
This fresh flow of cash poses more than one challenge for the banks that receive it. The big banks may be unsure whether the funds will stick around for long. And that uncertainty may make them hesitant to put the funds to use via loans or investments.
"Normally, you would welcome a big influx of deposits," said Matt Anderson, managing director at Trepp, a data provider for the banking industry. "Right now, I don't think anybody feels great confidence in being able to take new cash inflows in the form of deposits and turning around and doing anything meaningful with that."
What's more, higher deposit levels result in paying out more money to depositors overall. Higher deposit costs can reduce a bank's net interest margin, or the difference between its interest income and interest expenses.
Net interest margin, a key earnings metric, had been rising across the industry in recent quarters. Banks with more than $250 billion of assets recorded an average net interest margin of 3.06% in the fourth quarter of 2022, the first time the metric surpassed 3% since 2019, according to data from the Federal Deposit Insurance Corp.
It is too soon to tell which financial institutions have taken on more deposits than normal in the wake of the failures of Silicon Valley Bank and Signature Bank. Banks will release fresh deposit data when they report their first-quarter results next month.
But one sign that banks are attempting to manage their excess cash is the recent decrease in rates paid to depositors by some of the largest banks. Deposit savings rates at large banks have fallen steadily in recent weeks, according to Bankrate.com data.
"I know it sounds weird, but you can have a problem with too many deposits," said Brian Graham, a partner at Klaros Group, a financial services advisory firm. "The right answer for that problem is to reduce the number of deposits, and the most direct way to do that is through pricing of those deposits, and you can see that in real time."
There are some signs that the outflow of deposits from banks under the greatest pressure has slowed. PacWest Bancorp in Los Angeles said in a
Before the two regional bank failures this month, banks had been battling each other for deposits and sometimes struggling to keep up with the pace of interest rate increases by the Federal Reserve.
The recent uptick in big-bank deposits also has implications for capital requirements.
One capital requirement for financial institutions regulated by the Federal Reserve is the supplementary leverage ratio. The metric compares the equity value of a bank to its assets, regardless of the inherent risk of those assets. Most large financial institutions must maintain ratios of 3% or higher, and the largest holding companies are required to add an additional 2% buffer.
"When your balance sheet grows, even with almost-riskless assets like cash, you increase the amount of capital that you would otherwise be required to have," Graham said.
