In wake of bank runs, all eyes are on deposit flows, liquidity

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The strength of community banks' deposit bases — or the lack thereof — will take center stage during the coming earnings season.

The failures of Silicon Valley Bank and Signature Bank, along with perceived weakness among other regional banks tied to vulnerable corners of the slumping technology sector, caused isolated but substantial deposit runs that have analysts and investors eager for assurances and explanations from all banks.

"Everybody is going to face questions — everybody," Chris Marinac, the director of research at Janney Montgomery Scott, said in an interview. 

Most small lenders have little if any connection to the failed banks, he said. "But the industry is under pressure anyway, and some banks have clearly lost deposits, and investors want to know what's being done and what the strategy is to keep customers and support funding."

Analyst Scott Siefers of Piper Sandler said "turmoil has engulfed the banking industry" since early March, when Silicon Valley Bank's reliance on deposits from tech startups became widely known, causing customer panic and, quickly, the bank's demise. SVB held an outsized level of uninsured deposits — those accounts with more than $250,000, the threshold for Federal Deposit Insurance Corp. coverage.

"At issue has been the fear of deposit flight (especially uninsured deposits) from certain institutions toward safer havens either outside the banking ecosystem" — U.S. Treasuries and money market funds — "or within it to the largest banks," Siefers said in a report.

Absent individual bank disclosures, "it is impossible to know how flows have trended at the company-specific level," Siefers said, but analysts anticipate bankers will be compelled to provide detailed deposit information with their earnings reports in April. Piper Sandler is looking for color on deposit decreases — or increases, given some banks are viewed as safe havens — as well as movement on costs: Are banks paying more in interest to keep customers or are they borrowing to fortify funding sources?

Additionally, the analysts want to know if banks are taking new steps to insure accounts with more than $250,000 and what their expectations are for deposit levels and costs moving into the second quarter.

Siefers said that banks lost about $100 billion of deposits between March 8 and March 15 alone, according to federal data. He noted that there are about $17.5 trillion of deposits in the system overall, so the decline that week wasn't "crushing by any means."

For perspective, he added, the industry has lost $50 billion or more in 10 separate weeks to Treasuries, money markets and other destinations since the Federal Reserve began its interest-rate-hike campaign early last year. Given that context, the $100 billion outflow in early March "doesn't look terrible," Siefers said. Nevertheless, "it's an astonishing number on its surface. And it indeed represents the single largest weekly deposit outflow since the Fed started raising rates."

Should earnings season show banks are suddenly in need of deposits or facing mounting funding costs, executives are also likely to face questions on mergers and acquisitions. 

Observers say the confusion and uncertainty caused by the bank failures is sure to temporarily stall M&A talks in the first half of this year, as buyers and potential sellers try to make sense of the situation.

However, should some banks find themselves grappling with festering liquidity issues, they are likely to consider selling in the second half of 2023. Banks with strong financial foundations could seek to capitalize as buyers, said Sid Khosla, Ernst & Young Global Limited's Americas financial services strategy and transactions managing partner.

Khosla also said that in the wake of any banking crisis, regulations tend to mount. 

"When that happens, it becomes another strain on cost structures," he said in an interview. "I do anticipate that triggering the next wave of consolidation" among small banks in particular, he said. 

Bank buyers, including larger community banks and small regionals, can likely better absorb regulatory burdens while pursuing M&A to diversify their deposit bases and bolster confidence among their investors, Khosla said. These banks would be on the hunt for deals that could provide diversity across both geographies and types of customers, he said. 

For those positioned to acquire, "it becomes a strategic and competitive advantage," Khosla said.