Bank Deposits Down Despite Rising Interest Rates

Rising interest rates are often seen as a good thing for savers, but surprisingly, bank deposits are actually down despite this trend.

People are holding onto their cash longer, waiting for interest rates to rise even higher.

In the past year, the average interest rate on a one-year savings account has increased from 1.5% to 2.5%.

This increase in interest rates is not enough to entice people to put their money in the bank, suggesting that there's a deeper issue at play.

A manual error caused the deposit delays at multiple US banks, according to The Clearing House. This error impacted less than 1% of the daily Automated Clearing House (ACH) volume in the United States.

The Clearing House, which operates the ACH system, stated that the issue was not linked to a cybersecurity issue. In fact, the company emphasized that customer deposits remain safe.

A processing issue at the ACH system caused the delay, as alerted by the Federal Reserve. The error was introduced by a human mistake, not a malicious attack.

The ACH system processes about 74 million transactions on a daily basis, totaling nearly $155 billion, according to Fed data. This highlights the complexity and volume of transactions that can be affected by a single error.

Banks, like Bank of America, have assured customers that their accounts remain secure and that their balance will be updated as soon as the deposit is received.

As we look ahead, it's essential to understand the factors contributing to bank deposits down. Elevated uninsured deposit sensitivity is a significant concern, as it can lead to financial instability.

The Federal Reserve's vice chair for supervision, Michael S. Barr, emphasizes the importance of humility when predicting financial stress and its effects on the system. This suggests that even with the best intentions, we may not fully grasp the consequences of our actions.

To stabilize or reverse deposit declines, banks need to pass on more of the change in interest rates to depositors. This can be a challenging task, especially for smaller banks.

Here are some key takeaways to consider:

Some depositors are taking their cash out of the traditional banking system and moving it into government or Treasury money-market funds (MMFs), which offer a higher yield and are considered a relatively safe place to store cash.

These funds are regulated to hold high-quality, short-term, and very liquid assets, making them an attractive option for those looking for a safer alternative to bank deposits.

According to Fitch Ratings, MMFs continue to be "flight-to-quality" asset classes, given their lower credit and liquidity risks and higher yields relative to bank deposits.

However, money market funds have had problems during financial market turmoil, and the U.S. government and the Fed have had to step in and backstop the market at times.

The possibility of a U.S. Treasury default could pose liquidity and headline risks and ratings pressure for U.S. Treasury-only MMFs, according to Fitch.

For now, some corporate treasurers may have more faith in the U.S. government as a counterparty with high credit and are happy to earn greater returns simultaneously.

Here are the key benefits of money-market funds:

Deposits at FDIC-insured banks fell almost $100 billion in the quarter ended June 30, after a record $472 billion decline in the first quarter amid the banking crisis.

The decline was mostly driven by uninsured deposits, or those exceeding the FDIC's $250,000 insurable limit, which fell $180.6 billion, or 2.5%, in the second quarter.

Net income across the industry fell by $9 billion, or 11.3%, to $70.8 billion for the quarter ended June 30, down from a peak of nearly $80 billion in the preceding quarter.

Total deposits for more than 4,600 FDIC-insured banks fell $98.6 billion in the second quarter, marking the biggest quarterly decline on record.

Uninsured deposits were a key driver of this year's banking crisis, as the banks that failed—Silicon Valley (SVB), Signature, and First Republic—had the highest exposure to uninsured deposits as a percentage of the total.

Here's a breakdown of the decline in deposits:

The banking industry continues to be resilient despite the period of stress earlier this year, according to FDIC Chair Martin Gruenberg.