Depositors withdraw another $126 billion from US banks

Depositors drained another $126 billion from U.S. banks in the week ended March 22, according to new Federal Reserve data. This time the outflow came from the country’s largest institutions.

The largest 25 banks lost $90 billion on a seasonally adjusted basis, according to the Fed. The smaller banks, which suffered massive withdrawals last week when regulators seized regional lenders Silicon Valley Bank and Signature Bank, were able to stabilize their outflows. They actually got back $6 billion on a seasonally adjusted basis.

Total industry deposits fell to $17.3 trillion, down 4.4% from the same week a year ago. It is the lowest level since July 2021[ads1].

The new figures reinforce some trends that were already in place. Deposits had declined at all banks before the Silicon Valley failure, falling in each of the first two months of the year. Deposits for all banks also fell by 5% annually in the fourth quarter of 2022.

Many observers attribute this industry-wide shift to pressure applied by an aggressive Federal Reserve campaign to lower inflation.

During the early part of the pandemic, when interest rates were historically low, banks were flooded with deposits. When the Fed started moving those rates higher to cool the economy, customers who had deposits started looking for places with higher returns. The first year-on-year decline in deposits for all banks came in the second quarter of 2022.

Some of this money flows to money market funds. Since the beginning of January, investors have poured $508 billion into these funds, according to a Bank of America research note, the highest quarterly inflow since a peak earlier in the pandemic. Another $60 billion was added to these assets in the past week.

Authorities and industry officials have been working to prevent massive deposit outflows in the wake of March’s bank failures. Regulators promised to cover all depositors in both banks they seized, hoping that would quell any panic, and also promised to help other regional banks if needed. Eleven giant banks also decided to give a troubled regional lender, First Republic, $30 billion in uninsured deposits to stabilize the situation.

The challenge deposit outflows create for all banks is that if they increase interest rates on their deposits to retain customers, it can make them less profitable. But if they lose too many customers, as Silicon Valley Bank did, they give up critical funding and may have to sell assets at a loss to cover withdrawals.

Silicon Valley Bank customers withdrew $42 billion in one day, leaving the bank with a negative cash balance of $958 million. That forced regulators to seize the bank, which was the 16th largest in the United States

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