Wealth management deposits at a number of banks have fallen amid intense competition from alternative investments and rival banks, even as other types of deposits have been stabilizing.
Weekly deposit outflows from wealth management accounts have been running at twice their rate before this year's bank failures, according to new data from Curinos, a financial services consulting firm.
Bank customers with excess cash are increasingly choosing money-market funds and Treasury bills over traditional wealth accounts. Consistent interest rate hikes have made alternative investments more appealing, laying the foundation for wealth deposits to keep falling.
"A lot more people started to look at moving their money," said Adam Stockton, director of retail deposits at Curinos. "In some cases, they were thinking about concentration risk and exposure and asking themselves, 'Do I have too much sitting at one bank?'" Stockton said.
Deposits flooded into the U.S. banking system during the pandemic, as consumers and businesses alike put money away for an economic hurricane that never hit.
But amid rising interest rates, the total level of deposits has started to come down over the past year. Overall deposits at U.S. commercial banks declined to $17.4 trillion at the end of July, according to data from the Federal Reserve. That is a 5% drop from the all-time high of $18.2 trillion in April 2022.
In recent months,
The outflows began during the springtime banking crisis, when some consumers started to question the safety of their financial institutions. While the runoff in business deposits, also known as commercial deposits, stabilized soon after the crisis, that has not been the case for wealth deposits.
Wealth deposits were among the most volatile during
The uninsured rate for business deposits was 97%. For consumer deposits, by contrast, it was 26%.
Since this spring's bank failures, many financial institutions have taken steps to bring more of their business and wealth deposits under the Federal Deposit Insurance Corp.'s umbrella, but the majority of them remain uninsured.
The outflow of business deposits has normalized since the spring, thanks to improved confidence in the banking system among commercial customers, as well as efforts by lenders to attach strings to those relationships.
Many financial institutions are suggesting that companies must keep deposits at the bank in order to receive loans to run their business, said Chris Marinac, director of research at Janney Montgomery Scott.
"Businesses are acting as they're told, and putting money with banks," Marinac said.
But the story in wealth management is different, with some banks reporting that their wealth deposits fell during the second quarter. Fifth Third Bancorp reported a 12% decline in wealth and asset-management deposits, compared with a 1% decrease in commercial deposits and about 1% of growth in consumer deposits.
The decrease reflected "the impact of tax payments as well as clients' alternative investment options," Fifth Third Chief Financial Officer James Leonard said during an earnings call last month.
Also on a July earnings call, Hancock Whitney CEO John Hairston said that competition from Treasury bills has been "ferocious" in recent quarters. Consumer and wealth deposits make up about half of the $36 billion-asset bank's total deposit base.
At Rosemont, Illinois-based Wintrust Financial, wealth management deposits fell by almost $400 million in the second quarter. But overall deposits grew by $1.3 billion, as increases in other types of types easily outstripped the decline in the bank's wealth business.
Bank of America's wealth management arm "normally shows the most relative rate movement because these clients tend to have the most excess cash," Chief Financial Officer Alastair Borthwick said on a second-quarter earnings call. Deposits in the bank's global wealth management arm declined about 3% to $293 billion in the second quarter.
Across the industry, declining deposit levels put more pressure on net interest margins, already a sore point for banks.
Eventually, interest rates are expected to start declining, which will make alternative investments less appealing to wealth management clients.
In the meantime, banks that have seen notable declines in wealth deposits can try to stem the flow by better understanding customers' underlying needs, Stockton said.
For example, customers with excess deposits for long-term goals like retirement are most likely to shop around for higher savings rates. In contrast, money set aside for emergencies, which depositors often need to access at a moment's notice, are more likely to stay at their current financial institutions.
"There are pools of money that are fundamentally a lot less rate-sensitive," Stockton said.
