Deposit outflow from the banking industry slowed to $38.30 billion during the week ended March 29, the third week after two large bank failures shook the industry. The week's outflows impacted large institutions, as deposits at small banks bucked the trend and increased $1.60 billion during that same week.
The latest data, published April 7 and covering the week ended March 29, showed a move toward stability after the initial turmoil. For comparison, during the week that ended March 15, which included the failures of Silicon Valley Bank and Signature Bank, industrywide deposits fell $129.19 billion, with outflows of $196.28 billion at small banks and inflows at large banks.
The data is consistent with the stabilization in emergency borrowing from the Federal Reserve through a combination of the discount window and the new Bank Term Funding Program, after a spike immediately following the failures.
The weekly deposit flows nevertheless contributed to a notable drop so far in 2023.
Banks boosted cash but other borrowings fell during the week ended March 29. Over the three most recent weeks together, banks have aggressively compensated for deposit outflows by building up their other borrowing, which is up $479.41 billion during the three weeks, and via defensive liquidity, with cash up $404.12 billion over the same time.
Bank borrowing from the Federal Home Loan Banks has been heavy, with FHLB bond issuance, which funds the advances to banks, spiking to $246.64 billion in March, compared with a monthly average of $58.69 billion over the preceding 12 months. Rotation from deposits to money market mutual funds, which are important buyers of FHLB bonds, has also been sizable, with money market funds adding $304.33 billion of total net assets during the three weeks through March 29.
Daily FHLB issuance subsided after the middle of March, however. Some banks have told analysts that they took out advances as a precaution against deposit outflows, but that they have already paid them off, or plan to if the outflows do not materialize for them.
Banks also continued to trim securities portfolios, which are down $230.98 billion over the three weeks, reflecting concerns over liquidity.
The weekly data on deposits and other bank balance sheet items are for domestically chartered US banks and seasonally adjusted. Small banks are all but the 25 largest by domestic assets. The data is published by the Fed, which collects weekly reports from a sample of about 875 banks and foreign-related institutions and estimates amounts for the rest.
The data is subject to revisions, and the Fed said in notes that those included a reduction in securities of $114 billion and a reduction in loans of $60 billion over the two weeks through March 29, reflecting divestitures by commercial banks. First Citizens BancShares Inc. did not buy Silicon Valley's bonds in its deal for most of the failed bank. New York Community Bancorp Inc. did not buy Signature's bonds or many of its loans in its deal for that failed bank.
Lending slowdown
The funding turmoil at banks is expected to eat into banks' appetite for lending and hurt the economy.
Going into 2023, expectations for loan growth for the year at a typical bank was in the mid- to upper-single-digit-percentage range, said Christopher McGratty, head of US bank research for Keefe Bruyette & Woods. Now expectations are lower because of liquidity concerns and higher funding costs.
Funding loan growth has "become pretty unprofitable," McGratty said in an interview. "Some banks will probably pull it back in growth, maybe have negative growth. Most banks will still have positive growth near term, but the rate of change is slowing."
Matt Pieniazek, president and CEO of Darling Consulting Group, concurred that the loan growth outlook is deteriorating because of factors like higher funding costs and credit and liquidity concerns, with banks demanding more collateral and higher loan spreads. Pieniazek said in an interview that banks' perspective on funding new loans is that "the last thing I want to be doing now is having to get aggressive with my deposit rates because I don't want to go borrow money and have people think I'm borrowing money because I've got a problem."
Banks had already reported a sharp tightening in underwriting standards before the failures, with recession fears over the Fed's tightening campaign in play for some time. "We're not chasing loan growth, because I think we don't know where we're going," Citizens Financial Group Inc. Vice Chairman and Head of Commercial Banking Donald McCree said at an investor conference March 7. "It's going to be pretty unusual that we bring on a lot of new clients right now because we're just going to be a little bit risk-averse."
Unused credit lines, one indicator of lending appetite, did increase 1.2% across US banks in the second half of 2022, according to S&P Global Market Intelligence data. That was a slowdown from the increase of 4.7% in the first half of 2022.
A dramatic pivot in lending since the failures happened is not yet evident. In the three weeks through March 29, loans were down by $43.39 billion, or 0.4%.
Pieniazek said loan pipelines are contracting, and that since it often takes 60 to 90 days for loans to close, there will be a lag before the shift appears in loan volume data. "What we're hearing from most banks is that their pipeline inflow is less than the outflow," he said.
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Quarterly trends
The weekly balance sheet data now covers most of the first quarter, with banks scheduled to start reporting individual results for the quarter on April 14.
From Dec. 28, 2022, through March 29, 2023, seasonally adjusted deposits at domestically chartered banks fell $503.08 billion, or 3.1%, a considerably faster pace than indicated by the weekly data corresponding with the previous three quarters. That is despite a $243.89 billion, or 29.8%, increase in relatively costly large time deposits over the same time. Seasonally adjusted deposits peaked in March 2022.
Loans were up 0.8%, continuing a deceleration in growth over the previous three quarters.
Without seasonal adjustment, deposits were down 3.1% and loans were down 0.3%.
