Clients of the largest U.S. banks withdrew funds this month at the fastest weekly pace since the Sept. 11 attacks as a deposit-insurance program ended and customers tapped into their year-end cash hoards.
Net withdrawals at the 25 largest U.S. lenders totaled $114.1 billion in the week ended Jan. 9, pushing deposits down to $5.37 trillion, according to Federal Reserve data released last week. The magnitude of the drop was second only to the decline after the Sept. 11, 2001 terrorist attacks, according to Jason Goldberg, a New York-based analyst at Barclays Plc.
Customers may be moving money no longer insured by the U.S., drawing down year-end balances and investing in advancing equity markets. A Federal Deposit Insurance Corp. backstop, the Transaction Account Guarantee program, ended last month, prompting some analysts, investors and trade organizations to predict it could drive funds from the banking system.
“What you are seeing now is probably TAG money,” Subadra Rajappa, a fixed-income strategist at New York-based Morgan Stanley, said in a phone interview. “Some of the banks’ corporate customers have said they were going to take the money out” if the program expires as it did, she said.
The transaction-account protections were introduced in the wake of the 2008 credit crisis and had guaranteed about $1.5 trillion in non-interest-bearing accounts above the FDIC’s general limit of $250,000. The program expired Dec. 31.
Deposits closed the year at about $5.4 trillion, the highest month-end total in 2012 and more than $500 billion higher than at the end of 2011, according to Fed data.
Industry groups such as the American Bankers Association and Independent Community Bankers of America had sought an extension for TAG to keep accounts from being moved.
“We knew that fund managers would re-evaluate where they want to keep their money -- in a non-interest bearing account, another account at the bank or in other investments,” James Chessen, chief economist at the ABA, said in a phone interview. “If it continues there will be reason to be concerned.”
Total money-market-fund assets climbed $70 billion in the two weeks ended Jan. 8 to $2.7 trillion, according to money-fund research firm iMoneyNet in Westborough, Massachusetts. Assets fell to $2.69 trillion in the week ended Jan. 15.
The rate to borrow and lend Treasuries in the repurchase agreement, or repo, market fell as government debt may have served as an alternative to insured bank deposits.
The overnight Treasury repo rate, measured by the Depository Trust & Clearing Corp. general-collateral finance repo index, is about a third of its 0.25 percent fourth-quarter average. The rate, published at the end of the trading day by the DTCC, was 0.08 percent yesterday, the lowest in over a year.
“Given the recent decline in repo rates, it’s a clear sign of that cash entering the repo market,” Scott Skyrm, former head of repo and money markets for Newedge USA LLC, wrote on his website today. Skyrm said repo rates decline about 0.025 percentage points for every $100 billion of bond-buying by the Fed. “If the relationship holds for former TAG funds, then there is no doubt a few hundred billion just came into the repo market.”
Another set of Fed figures show some deposits may have moved within the banking system, from one type of account to another.
Savings and other time-deposit balances at commercial banks rose about $186 billion. Demand deposits at U.S. banks and branches of non-U.S. lenders dropped almost $187 billion, and so-called checkable deposits fell by $16 billion. The data measure deposits through Jan. 7, two days before the central bank’s newer data measuring outflows at the 25 largest lenders.
Some deposit moves may also reflect year-end balance-sheet management by corporate customers, according to Chessen and strategists including Alex Roever at JPMorgan Chase & Co. (JPM:US) and Bank of America Corp. (BAC:US)’s Brian Smedley. Rajappa said it’s too early to say for sure what caused the drain of deposits.
The 25 largest banks lost almost $53 billion of deposits once seasonal variations are taken into account, according to the Fed data released Jan. 18. That shows some of the decline is tied to “calendar-related effects,” Roever said.
“You see a run-up in deposits at year-end and then a draw- down after the start of the year,” he said in a phone interview. The cash isn’t going into investments one would expect if it were coming from FDIC-insured accounts, such as Treasury or government-related money-market funds, he said.
“If people were shifting out of bank deposits and looking for a government-type return we’d see more growth in Treasury funds,” he said. “It doesn’t seem to be happening.”
Treasuries had declined 0.31 percent this month through yesterday, Bank of America Merrill Lynch data show.
The Standard & Poor’s 500 Index climbed today for the sixth straight session and has gained 4.8 percent in 2013. Global investors are the most bullish on stocks in at least 3 1/2 years, with close to two-thirds planning to boost equity holdings within six months, according to a Bloomberg survey.
The outflow follows a year in which total deposits from all sources and regions surged as much as 8 percent at the nation’s five biggest lenders, with the fastest pace set by San Francisco-based Wells Fargo & Co. (WFC:US) and Minneapolis-based U.S. Bancorp. Wells Fargo had $945.7 billion in core deposits at year-end. U.S. Bancorp reported $249.2 billion of deposits.
JPMorgan, ranked first by deposits, reported a 6 percent rise for 2012 to $1.19 trillion. Bank of America, ranked second by assets and based in Charlotte, North Carolina, boosted deposits 7 percent to $1.11 trillion, the same pace as New York- based Citigroup Inc. (C:US), with $930.6 billion at year-end.
For the largest lenders, the decline in deposits this year may be a welcome trend, Chessen said. An increase coupled with weak loan demand means banks must purchase lower-yielding securities, driving down profit margins, he said.
Net interest margins, a measure of profitability represented by the gap between what banks pay depositors and what’s earned on loans, are falling across the industry. The figure at Wells Fargo and JPMorgan fell at least 0.3 percentage point in the fourth quarter from a year earlier, according to company statements.
“The bigger banks have to pay FDIC insurance on these deposits plus some of their capital and leverage ratios are adversely impacted,” Rajappa said. “Many of the banks don’t want these.”
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