Where Your Deposit Balances Are Going

Deposit Management

Go to any bank conference, bank investor gathering or analyst meeting and the hot topic is the slowdown in deposit growth. As the economy keeps rolling and the Federal Reserve continues to raise rates, the topic of a bank’s increasing cost of funds, slowdown in deposit growth and the jump in liability interest rate sensitivity are on everyone’s minds. Last week we received the Federal Reserve’s Z.1 Report that not only provides confirmation that deposit growth is hard to come by, but provides more clarity about the movement of money on balance sheets. In this article, we break down the data and provide actionable insight into what to do about the conclusions.


Changes in Checking, Savings and Time Deposits


Checking balances at banks dropped a sharp $352B in 2Q compared to an increase in Q1 (below). Savings accounts and time deposits did a little better at banks, but we note that higher rates and more marketing by credit unions resulted in a significant increase for them. In total, a majority of banks saw deposits slow. 


Change in Deposits at Banks and Credit Unions


Savings and Time Deposit at Banks and Credit Unions


Corporate Balance Sheets


For corporations, deposit balances peaked in the fourth quarter of 2017 and had fallen $112B since then.  Most of the decrease was a result of operating account balances (-$72B), money overseas (-$31B) and savings accounts (-$9B). We have seen this decrease here at CenterState as well as at many other banks and the traditional assumption during a period of rising rates is that the money is flowing out of banks and into higher-yielding money market mutual funds and repo products. 


Liquidity Changes at US Corporations


However, after doing research, we see that corporate money market fund and repo balances are down $5B and $41B, respectively. Where is the money going? To find that answer you can look to Tax Reform as it appears that funds are being invested in capital projects as well as being used to reduce debt. What was a 4% to 5% growth rate in corporate debt, is now closer to 3%.


We quickly add that if you drill down and remove finance companies, while checkable, savings and time deposits are down for US corporations, money market funds are slightly up from the first quarter of this year. This is likely due to higher rates which banks must now compete against. For example, many of these funds, such as BlackRock’s or Federated’s Prime Money Market fund currently pay between 2.14% and 2.25%.


Household Balance Sheets


For households, net worth increased almost $2.2T (below). Deposit balances are up this year by a significant $342B. Notable for banks, this increase in deposits as occurred at a time when other financial assets, like equities and real estate, has increased as well. It appears that households, feeling wealthier, are leaving more of their relative assets in cash as prices increase in alternative investments. 


Changes in Household Non-Profit Net Worth


Similar to businesses, retail customers have decreased their money market fund holdings as balances are down $22B year-to-date. Also notable is the increase in fixed income assets. Holdings of Treasuries has jumped as have corporate bonds, and agencies while municipal holdings have declined.  Net, fixed income assets held by households are up some $928B for the year.


Putting This Into Action


Banks should prepare for tougher times in deposit gathering ahead. The general trend of decreasing checking, savings, money market and time deposit balances are likely to continue for the next couple of years or more as rates for alternative investments rise.


The above data points to targeting retail as a natural place to start. However, among commercial customers, the data shows that insurance companies, financing corporations, and some municipalities are targets where cash balances are either increasing or at least maintaining their current levels.


Banks should also consider instituting or better marketing their money market mutual fund sweep. While doesn’t directly help build deposit balances, what it does is give banks control over the funds, so they don’t leave the bank. In this manner, banks can control the rate they pay on both the deposits and the money market mutual fund to influence where the balances go and the amount of fees collected. Banks that don’t have an off-balance sheet sweep will continue to be at a strategic disadvantage to the banks that do.  


Finally, banks need to continue to get creative on their customer targeting, new product creation, and marketing. If you are not actively marketing the non-rate attributes of your deposit products either you have a product management problem or a marketing problem - either way, both those places are first stops before you join the chorus of the industry executives that complain about deposit growth.