Small and mid-sized banks lost $109 billion in deposits in just one week as the failures of Silicon Valley Bank and Signature Bank rocked the banking industry, according to Federal Reserve data released March 24.
According to the report, deposits at the banks fell to $5.46 trillion the week of March 15 from $5.57 trillion on March 8 as deposits at large commercial banks rose $120 billion to $10.79 trillion from $10.67 trillion the previous week. Deposits at all commercial banks fell to $17.5 trillion from $17.6 trillion on March 8.
The banking industry has been in a state of flux following the failures of California-based Silicon Valley Bank and New York-based Signature Bank. The New York Department of Financial Institutions closed the $110 billion Signature on March 12. The bank had faced a crisis in confidence after California-based SVB failed March 10 following an unsuccessful capital raise. Last week, a group of the largest U.S. banks invested $30 billion into embattled San Francisco-based First Republic Bank.
RSM US LLP Principal and Chief Economist Joseph Brusuelas said the shift occurred “because deposits at systemically-important financial institutions have the implicit backing of the federal government — recall the financial crisis — and those at the regional and community banks do not.”
“In our estimation, this puts at risk the deposits of millions of U.S. households and the small and medium-sized firms that employ them,” Brusuelas said.
Treasury Secretary Janet Yellen said last week that the government is willing to expand FDIC insurance to regional and community banks in distress. Her comments came four days after she indicated in Senate testimony that the deposit cap would only be lifted at large banks considered large enough to pose a systemic risk if they failed, a designation likely excluding midsize and community banks.
According to RSM, the federal government should explicitly guarantee to cover deposits for both U.S. households and banks. Brusuelas supports a “public-good model” for banking, which would require additional regulation for all banks along with stress tests to assess balance sheet exposure to interest rate risk and an economic downturn.
“Concerns of moral hazard that would be raised with the expansion of deposit insurance deserve further consideration, as does its cost,” he added. “But the structural changes in the economy over the past two decades have outrun the framework that was stitched together after the Great Financial Crisis. The status quo is untenable for small and midsize banks.”