This article assesses how deposits have fared during the second half of the current monetary policy tightening cycle. We found that although deposit beta continued to rise, it did not accelerate after the March 2023 run. Furthermore, while overall deposit funding remains stable, we find that banks most affected by the events of March 2023 are offering higher deposit amounts. It has increased interest rates and increased deposit funds relative to the banking industry as a whole.
Monetary policy and bank security losses
The beginning of 2022 saw a unique situation in the banking sector compared to previous cycles. Deposits and reserves were at their highest levels since the 2007-08 Global Financial Crisis (GFC), and policy interest rates were effectively at the zero lower bound. This situation is due in part to the unique nature of the coronavirus recession and the various forms of government support aimed at minimizing disruption to banks, businesses and households.
The Fed began a rapid tightening cycle in March 2022 to combat a significant rise in inflation. By March 2023, rising interest rates had reduced the value of various fixed-rate assets such as securities and mortgages, resulting in large unrealized losses for the banking sector. Typically, such losses remain unrealized. This is because banks can hold fixed interest rate assets until maturity. This is because fixed-rate assets are financed by debt with relatively fixed long-term maturities (see this post from April 2023 for more information on this phenomenon). However, in this case, several banks experienced depositor flight in response to solvency concerns.
Given these disruptions, widespread unrealized losses could prompt depositors to reconsider their behavior, forcing additional financial institutions to raise deposit rates and raise expensive financing to avoid selling assets and realizing interest-related losses. and risked jeopardizing the broader banking system. .
The industry’s deposit situation appears to be stable.
Although the cost of deposits relative to prevailing interest rates continues to rise, the pace of change appears to have stabilized since the events of March 2023. The chart below shows the change in overall deposit interest rates relative to changes in the federal funds rate. Cumulative Beta – Over the past five tightening cycles in the banking industry. Since 2023:Q1, the cumulative beta of deposits has continued to rise. Although the current tightening cycle is similar to the one before the global financial crisis, there appears to be no sharp change in the progress of deposit pricing since the events of March.
Industry deposit beta continues to increase at a steady rate
Source: FR Y-9C data. Author’s calculations.
Note: Beta is the cumulative change in the implied deposit rate on total deposits (interest-bearing and non-interest bearing) relative to the change in the quarterly average federal funds rate. The implied deposit rate is estimated as the interest paid on deposits divided by the average quarterly deposit balance.
Nevertheless, the composition of bank funds continues to evolve. The graph below shows the evolution of industry funding sources relative to total assets in the second quarter of 2019. This exercise maintains a balanced panel of banks and excludes banks that failed in March 2023. This approach allows us to examine the relative importance of each category of funding and how funding changes over time.
This graph shows that the industry grew significantly during the economic downturn, with assets increasing by approximately 30 percent through Q4 2021 compared to Q2 2019 (dark blue line). The increase in assets was mainly financed by increases in interest-bearing deposits (light blue line) and non-interest bearing deposits (red line). Assets have been almost flat since the fourth quarter of 2021. The decrease in non-interest-bearing deposits was offset by an increase in other debt (Gold Line), such as advances and interest-bearing deposits (including term deposits) from the Federal Home Loan Bank (FHLB). These trends appear unchanged after the events of Q1 2023.
Industry asset growth is slowing, but overall funding is stable
Source: FR Y-9C data. Author’s calculations.
Note: Industry volumes are plotted against total assets in Q2 2019 to illustrate dynamics over time and importance to industry size. The first vertical line indicates the start of the current tightening cycle. The second shows the turmoil in the banking sector in March 2023. Bank-wide deposit prices and funding
Since the March incident, bank failures have been concentrated in a few banks, making it difficult to observe them at the industry level. Here we examine how deposit prices and funding conditions have changed for banks of various sizes. This is particularly insightful because much of the immediate distress following the events of March 2023 was concentrated in bank holding companies (BHCs) with assets between $50 billion and $250 billion, also known as “super-regionals.” (See May 2023 blog post). These banks experienced large deposit outflows, most of which went to the largest banks (those with at least $250 billion in assets).
The graph below shows the evolution of cumulative deposit beta across the bank size distribution during the current monetary tightening cycle. There are significant differences in the cumulative deposit betas, with the superregional (gold line) being the key outlier. These institutions’ deposit betas have generally been higher than those of smaller banks throughout this tightening cycle. However, the differences with smaller banks emerged before the first quarter of 2023 and remained consistent until the March episode. Indeed, since the run, there appears to be no meaningful change in the betas of super-regional banks relative to the betas of small banks.
For large banks, beta increases at a slower pace than for other banks. This may reflect the perceived safety of these institutions relative to other banks, and is consistent with the flow of deposits to the largest banks before and after the Silicon Valley Bank incident. I am.
Super regionals consistently show higher deposit betas
Source: FR Y-9C data. Author’s calculations.
Note: Beta is the cumulative change in the implied deposit rate on total deposits (interest-bearing and non-interest bearing) relative to the change in the quarterly average federal funds rate. The implied deposit rate is estimated as the interest paid on deposits divided by the average quarterly deposit balance. BHCs are placed into size buckets using an asset size of $2009:Q4.
On balance, super regional companies also have different funding patterns compared to the industry as a whole. The chart below summarizes the relative importance of each funding category, along with trends since Q2 2019. For super regionals, assets grew in line with the industry until the quarter when interest rates rose. However, after interest rates started rising, super-regionals continued to grow while the industry remained roughly flat. Super Regional BHC growth reflects continued increases in interest-bearing deposits and, to a lesser extent, other liabilities. In conjunction with the higher responsiveness of super-local banks to interest rates, these results suggest that these banks were able to not only further raise interest rates but also increase interest-bearing deposits relative to the industry. I am.
Hyper-regional asset and deposit growth outpaces industry
Source: FR Y-9C data. Author’s calculations.
Note: Industry volumes are plotted against total assets in Q2 2019 to illustrate dynamics over time and importance to industry size. The first vertical line indicates the start of the current tightening cycle. The second shows the turmoil in the banking sector in March 2023.
summary
The events of March 2023 further highlighted the sensitivity of deposit funding to macroeconomic and bank-specific conditions. Our review of deposit pricing and funding since then shows that the industry appears to have avoided significant changes in depositor behavior that would further pressure returns and capital. This may be partly due to government intervention, such as guarantees to depositors and the creation of bank term funding schemes.
We also document that super regional banks’ deposit pricing exhibits greater sensitivity to interest rate increases. As interest rates rise, these banks have also expanded their deposit capital relative to the banking industry as a whole. In my next post, I will explore the future path of deposit interest rates based on the current neutral stance of monetary policy.
Stephan Luck is a Financial Research Advisor for Banking Research in the Research and Statistics Group at the Federal Reserve Bank of New York.
Matthew Plosser is a Financial Research Advisor for Banking Research in the Research and Statistics Group at the Federal Reserve Bank of New York.
How to cite this post:
Stephan Luck and Matthew Plosser, “Deposits and the March 2023 Banking Crisis – Retrospective,” Federal Reserve Bank of New York Liberty Street Economics, March 27, 2024, https://libertystreeteconomics.newyorkfed.org/2024/03/deposit – And a look back at the March 2023 banking crisis/.
Disclaimer
The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
