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Deposit Losses and Bank Failures: A Closer Look at the Challenges Facing Regional Lenders

A Closer Look at Lower Deposit Levels

On Monday, First Republic announced that its deposits fell by slightly more than 40 percent during the first quarter, results that were worse than Wall Street had anticipated. Total deposit losses at the bank equaled $104.5 billion in the first quarter.

Although deposit activity at First Republic began to stabilize towards the end of the first quarter, stabilization did not make an appreciable dent in the quarter’s losses.

You can find the full article here.

Other regionals, such as M&T Bank Corp., also saw deposit losses in their first-quarter results. Read more on the results here.

Regional lenders are being closely watched for deposit declines after the failures of Silicon Valley Bank and Signature Bank in March. However, many of the large banks also saw their deposit levels fall. In the first quarter, for instance, deposits at JP Morgan dropped by seven percent and at Wells Fargo by eight percent compared to the first quarter a year ago.

Read more here.

Capping it all off an April 19th headline in the Wall Street Journal read: “The Era of Easy Deposits Is Over for Main Street Banks.”

More Trouble Ahead?

Bank deposit levels began dropping in 2022 as interest rates steadily rose each time the Federal Reserve ratcheted up rates. With rising rates, consumers found that there were competitive options for earning meaningful returns outside of their low yield checking accounts and without putting money into savings accounts. Financial institutions typically try to combat this by raising rates as a percentage of federal fund rate hikes to deter depositor exits. This percentage is typically referred to as deposit beta. However, given the speed and magnitude of rate changes, consumer sensitivity to alternative products has penetrated into what some bank’s

In 2023, attention turned to bank failures—a problem that has been driven by deposit volatility and unrecognized losses. Many believe this to be a systemic issue, with the most vulnerable being those institutions with concentrations of non-core deposits and high levels of unrecognized losses. Warren Buffett remarked in a three-hour interview with CNBC that more bank failures are on the way.

Warren suggested that some bank failures are caused by iffy accounting practices that have spurred banking executives to inflate current earnings in small ways. However, some of the practices behind recent failures (such as unrecognized losses) are industry standard and ultimately the cause of the downfalls was poor risk management (ex. balance sheet duration mismatches without sufficient hedging) and high speed erosion of consumer confidence causing runs on deposits. Learn more about it here.

Competition continues to pose a threat to deposits. Deposits at traditional financial institutions have always been a target, with non-traditional banks, alternative markets such as crypto, and other financial institutions. Take for instance, on April 17th, the Apple Card announced that its users could receive an APY of 4.15 percent via a savings account from Goldman Sachs.

You can find the full article here.

Competition and some broader industry turmoil doesn’t undercut the fact that financial institutions continue to serve a critical need in the US economic system. With this comes confidence from consumers to place their hard-earned money in community and regional institutions all with the security of the US government.

Competition and changing market conditions are a constant, they help to spur innovation in new products or just innovation in the delivery of existing products. Today’s situation is no different, and financial institutions will need to find new and innovative ways to reach consumers and remain competitive.

In conclusion, the recent decline in deposit levels across the banking industry has highlighted the need for financial institutions to adapt and find new ways to attract and retain depositors. Competition from non-traditional banks, alternative markets, and existing institutions isn't going away.

However, amidst this challenge lies an opportunity for financial institutions to innovate and find new channels for deposits. By leveraging technology such as RiskScout, banks can identify new and previously untapped channels for deposits. This technology can help to not only attract new depositors but also increase efficiency in the deposit gathering process.