Money Has Been Withdrawn From US Banks At Record Speed

In US banks, deposit volumes have started to fall rapidly after the post-coronavirus money printing boom. This demonstrates that the banking crisis in the spring undermined people’s trust in the banking industry. This may have contributed to the emergence of deflationary pressures.

According to the Federal Deposit Insurance Corporation (FDIC), there’s been a notable shift in U.S. bank deposits. Records show that, as of the end of June, these deposits have seen a year-over-year decline for the first time since such data began to be tracked.

The recent decline in U.S. bank deposits reflects a notable shift in consumer confidence and economic outlook

Deposits in the United States banking sector fell 4.8 percent year over year to $17.27 trillion. The bank runs that occurred in the spring during and after the failures of three banks—First Republic, Signature Bank, and Silicon Valley Bank—aided in this. Bank deposits fell year over year for the first time since data collection began in 1994.

“The recent decline in U.S. bank deposits reflects a notable shift in consumer confidence and economic outlook,” stated an FDIC spokesperson. Most major US banks reported deposit declines, with the top four accounting for roughly 30% of the $871.6 billion drop in deposits: JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup.

If we compare the data by quarter, deposits fell for the fifth quarter in a row. Deposits fell mainly due to unsecured deposits. In particular, the FDIC has insured up to $250,000 for each deposit; if something were to happen to the bank, the state would insure this amount. The spring bank crashes caused fear in people, and many have withdrawn deposits from banks that exceed the insurance limit.

The graph shows how deposits start to grow very sharply in the first quarter of 2020. This is related to central bank money printing, which largely went into the government budget and was used to make direct payments to the people.

That money ended up in people’s bank accounts. It is interesting that the money printing of the previous decade was not so aggressively reflected in bank deposits because the money largely remained in the financial markets and thereby improved the capitalization of the banks. In the last decade, the largest quarterly increase occurred in the fourth quarter of 2012, when deposits increased by $313 billion. Compared to the beginning of 2020, this was three times less growth.

It is also noteworthy that the decline in deposits started even before the spring banking crisis of 2023. As can be seen, deposit volumes started to fall in the second quarter of 2022. The last major decline in deposits occurred in early 2010, when deposits fell by $86 billion over two quarters. Thus, the drop in deposits immediately after the financial crisis was almost ten times smaller than the current one.

Deflationary Process

All that money that went into deposits in 2020 and 2021 went directly into the real economy and was one of the main causes of inflation. The decline in the volume of deposits reflects the reverse process of withdrawing money from the economy. This is also clearly indicated by the decrease in the amount of money in circulation in the USA .

If bank deposits decrease, banks must reduce lending to balance their balance sheets. A large part of the money that was in deposits has also moved to money market funds. It is true that the volumes of loans and leases are still growing in US banks, but a certain slowdown has been noticed in the last few years.

Let us recall that the current monetary system is largely dependent on the growth of loans in the economy. With the loan, new dollars are created in circulation, to which interest is added. If the loan is repaid, the main part of the loan money is extinguished (the amount of money decreases), but the interest remains.

Since essentially all the money in circulation has been created at the time of borrowing, it is necessary to take out new loans to pay the interest on previous loans. Thus, the current monetary system is completely dependent on the growth of the volume of loans.

At a time of quantitative easing, we also expect a moderate decline in deposits across our businesses

At the same time, the Federal Reserve continues to hold key interest rates at their highest levels in 20 years, at a time when the system has been massively leveraged through borrowing. The decline in money supply and deposits clearly indicates that very strong deflationary pressure may be emerging. This suggests that to keep the current system together, interest rates would need to be lowered again; otherwise, we could end up in a deflationary spiral that is already much harder to get out of.

It is likely that interest rates will only be lowered when things quickly turn sour in the real economy. By that point, however, it is already too late to lower interest rates. Presumably, the crisis will be overreacted to again, and since the underlying trends are long-term supportive of inflation , we may see a sudden acceleration of inflation again in a few years.

Deposits At The Biggest Banks Are Falling

JPMorgan has the most deposits; they have been in first place among banks for three years in a row. Total deposits there fell 2.8 percent for the year to $2.07 trillion, despite the May 1 takeover of First Republic Bank and its deposits.

“At a time of quantitative easing, we also expect a moderate decline in deposits across our businesses,” JPMorgan CFO Jeremy Barnum said after reporting quarterly results in July. So-called quantitative easing is an anti-money printing process in which the Federal Reserve sells off assets previously purchased on the market with newly created money, meaning that previously created money disappears from circulation.

Bank of America’s total deposits fell 5 percent to $1.89 trillion. Bank of America’s market share in the US is 10.9 percent. Wells Fargo’s deposits fell 6 percent to $1.38 trillion. Citigroup’s deposits fell 0.8 percent to $757 billion.

S&P Global compiled a list of the 15 largest banks and their deposit volumes from FDIC data:

Among the 15 largest banks, deposits fell the most at Charles Schwab Corp., a total of 31.1 percent to $304.8 billion. The outflow was mainly from investment accounts (broker accounts).

Bank of Montreal was the biggest gainer; their deposits grew by as much as 52 percent year-over-year to $202.2 billion. Much of this was due to the acquisition of Bank of the West in February. The infamous Silicon Valley Bank (SVB) was the 15th largest bank in the US in terms of deposits as of the end of June 2022. By now, they have disappeared from the list because the bank has become insolvent. You can read more about the collapse of Silicon Valley Bank here.

The Key Takeaways

The recent dynamics in the United States banking system underscore a period of turbulence and uncertainty for financial institutions.

The failure of Silicon Valley Bank, among other failing banks, has raised concerns about the stability of commercial banks, igniting fears that billions in assets could be at risk.

This unease has manifested in the behaviour of account holders across the country, with many withdrawing funds from bank accounts and savings accounts, prompting a notable shrinkage in the balance sheets of even the largest banks.

The Bank Deposit Insurance Corporation (FDIC) has played a critical role in maintaining public trust, yet the pace at which money has been pulled from banking services suggests that deposit insurance alone may not assuage all fears.

The banking crisis has been compounded by the Federal Reserve’s stance on higher interest rates, a move aimed at curbing inflation. Also impacting the cost of borrowing and the attractiveness of new loans, thereby influencing the flow of venture capital.

Rising interest rates, while necessary for economic policy, also mean that the interest cost on credit cards, mortgages, and business loans increases, potentially leading to a slowdown in consumer spending and investment.

This combination of factors—a drop in deposits, a lack of confidence due to the banking crisis, and the pressure from higher interest rates—places significant stress on the financial markets.

Despite the turbulence, some large banks have shown resilience, though the overall landscape points to a need for cautious navigation ahead. The banking crisis has triggered a reevaluation of the current monetary system’s dependence on the growth of loans and the implications for long-term economic stability.

In summary, financial institutions in the United States, particularly commercial banks, face a complex array of challenges, from maintaining robust balance sheets to restoring confidence in banking services, all amidst an environment of rising interest rates and the aftereffects of recent bank failures.