Smaller US banks still at risk from deposit outflows as investors spread their cash
Smaller US lenders have so far faced a torrid earnings season as many have seen an exodus of deposits as their larger rivals rake in profits from higher interest rates.
Over the course of the week a series of smaller banks have seen deposits drop. On Monday, Charles Schwab, State Street and M&T reported that nearly $60bn between them was pulled over the first quarter.
On Tuesday BNY Mellon said its average deposits had fallen three per cent from the end of last year while, on Wednesday, Citizens Group reported that its deposits dropped five per cent.
Western Alliance, which has seen its share price fall nearly 40 per cent since the collapse of Silicon Valley Bank (SVB), said deposits fell 11 per cent in the first quarter, although the bank then saw its deposit base increase $2bn in the first two weeks of April.
Since the Fed started raising rates last March, investors have been parking their money in money market funds in search of higher yield.
This trend was turbocharged by the collapse of Silicon Valley Bank (SVB) amid fears that uninsured deposits were at risk of contagion. Money market funds saw $367bn of inflows in March.
Following these outflows, the largest lenders meanwhile saw inflows, with JP Morgan seeing a $37bn increase.
Although Citi and Wells Fargo posted a drop in deposits over the quarter, both banks said they had seen inflows in March specifically with Citi saying around $30bn had been parked in the bank.
The movement from smaller banks to larger banks suggests investors are taking action to reduce the risk of being caught up in a bank run.
In fact, new research from Clearwater Analytics shared exclusively with City A.M. shows that many investors spread their money around different banks in an attempt to keep their funds safe.
In a survey of 254 investors holding over $10tn between them, 31 per cent of firms said they increased the number of banks at which they held cash or short-term investments as a result of the banking crisis.
A further 28 per cent changed the bank where they held cash or short term investments.
Clearwater’s chief revenue officer Scott Erickson commented: “What we are seeing is a fundamental shift in investing strategy from institutional investors in response to the crisis of confidence that has hit the banking sector over the last two months.
“They have been moving their short-term holdings, and fast, and putting faith in the behemoths of Wall Street as a safe haven for their cash,” he continued.