Experts cite deposit dip as factor in bank crisis

Depositors have accelerated withdrawals amid recent bank failures and sharply rising interest rates, raising concerns about the industry’s health and ability to withstand a crisis, experts say.

Bank deposits fell by nearly $720 billion between the second and fourth quarters of 2022, leaving banks’ cash assets earlier this month at their lowest levels in more than two years.

Banks have been slow to pass better interest rates on traditional accounts along to consumers, prompting a shift to money market funds, government bonds or other more lucrative investments.

A new $300 billion special lending program the government made available following the failures of Silicon Valley Bank and Signature Bank has since helped slow the outflow.

Many smaller banks seemingly dipped into the package to boost their assets as a precaution.

“The size of the support suggests banks have a big hole in their finances,” said Brad Mcmillan, chief investment officer for Commonwealth Financial Network.

“They now must fill that hole, which will mean fewer and more expensive loans across the economy,” Mcmillan said.

The Federal Reserve’s key overnight rate has risen to 4.75% to 5%, up from virtually zero at the start of last year.

That’s prompted yields to rise on longerterm Treasurys and other bonds, reducing the value of the lower-yielding Treasurys that banks held.

The run on Silicon Valley Bank resulted in its inability to raise enough cash from the sale of Treasurys to pay depositors who were trying to withdraw their money.

Falling deposits could result in lower returns on loans or higher costs for lending.