US banks continued to reduce their uninsured deposit exposure as regulators call for more scrutiny of those deposits.

Uninsured deposits at US banks fell slightly in the second quarter, both as a dollar amount and as a percentage of total deposits, to $6.876 trillion, or 41.1% of total deposits, from $7.044 trillion, or 41.9%, in the first quarter, based on restated first-quarter data. The dollar amount is now at the lowest level since the first quarter of 2020, and the percentage to total deposits is the lowest in more than three years.

Largest concentrations

Among banks with at least $25 billion in assets in the second quarter, the top three banks with the highest proportion of uninsured deposits to total deposits stayed the same. Deutsche Bank Trust Co. Americas maintained the top spot and Bank of New York Mellon, a subsidiary of Bank of New York Mellon Corp., and State Street Bank and Trust Co. remained second and third, respectively.

Flagstar Bank NA, a subsidiary of New York Community Bancorp Inc., saw the largest quarter-over-quarter increase in uninsured deposits among banks in the analysis. The 28.2% increase was "primarily due to a $5.9 billion increase in custodial deposits" from the Federal Deposit Insurance Corp. related to New York Community Bancorp servicing the loans the company did not buy in the transaction when Signature Bank failed, New York Community Bancorp spokesperson Salvatore DiMartino said in an email.

BNY Mellon NA, another subsidiary of Bank of New York Mellon Corp., had the second largest quarter-over-quarter change, with uninsured deposits up 24.1%. U.S. Bank NA's uninsured deposits were up 15.1%, the third largest quarter-over-quarter change.

Typically, trust banks, such as Bank of New York Mellon, Northern Trust Co. and State Street, and banks with large corporate client bases tend to have higher levels of uninsured deposits. Those companies describe much of their uninsured corporate deposits as "stickier" than uninsured retail deposits.

In the case of corporate client deposits, those can be stickier because of their necessity for business operations to pay payroll, collect money from vendors, and for other regular corporate operations. They may be well integrated with treasury management services provided by the bank, which would make moving deposit accounts to another financial institution a significant undertaking.

For example, at Bank of New York Mellon, two-thirds of deposits are operational, according to executive commentary during the company's second-quarter earnings call.

Separately, a municipal deposit backed by pledged securities such as Treasurys would have collateral available to make up for any shortfall from deposit insurance.

Potential regulatory changes

Uninsured deposit totals stand to change if the FDIC updates its deposit reporting rules or raises deposit insurance assessments based on risk — a possibility FDIC Chairman Martin Gruenberg recently alluded to in an Aug. 14 speech.

"The FDIC is reviewing whether its supervisory instructions on funding concentrations should be bolstered to better capture risks related to high levels of uninsured deposits generally or types of deposits more specifically, such as business operating account deposits," Gruenberg said, according to his prepared remarks.

The agency could establish a specific threshold for uninsured deposits concentration that would require examiners to give more attention to that bank's deposit base, require more granular and frequent deposit reports and charge higher assessments for uninsured deposits based on the risk associated with them, he said.

An approach like charging risk-based deposit insurance assessments would "deter banks from relying too heavily on less stable forms of funding such as uninsured deposits and can maintain fairness by charging banks with unstable funding sources for the risk they pose to the Deposit Insurance Fund," Gruenberg said.

Banking industry experts told S&P Global Market Intelligence that such regulatory changes would lead some banks to change their behavior and reduce concentrations by diversifying their deposit bases.

"If they're going to pay a higher rate if they're over a certain threshold of uninsured deposits or brokered or reciprocal deposits, if they start to slice and dice those deposit bases differently, then the banks will have to react and make some economic decisions over what makes the most sense for their individual institution," Gary Tenner, managing director and senior research analyst at D.A. Davidson, said in an interview.