Bank deposit flight and the US money-market fund supremacy
US banks have seen $1.1 trillion in deposits flee the system over the past year. Much of this wound up in money-market funds that offer higher returns and the promise of safety and stability at a time of rising uncertainty. How dangerous is this for US lenders, and what can they do to convince flighty deposits to return to the banking system?
‘Deposit’ and ‘flight’ are two words no lender wants to hear. They are up there with ‘liquidity crisis’ and ‘bank run’.
They are also words we’ve heard a lot in the past few months. Silicon Valley Bank (SVB) was shuttered by the Federal Deposit Insurance Corporation (FDIC) on March 10 after it ran out of money. The previous day, around $42 billion in deposits fled the lender, leaving it with a negative cash balance of $958 million.
Credit Suisse was undone by many factors, but right at the top of the list are two nasty, brutish and short periods of deposit flight. The Swiss lender scrambled to handle the fallout when clients withdrew SFr84 billion ($94.3 billion) last October. When the panic returned in force in March, it was finished.
Each institution had its flaws. Credit Suisse liked risky clients too much. SVB had gone all-in on held-to-maturity bonds that became a financial drag as soon as the US Federal Reserve began to raise interest rates.