Small and mid-size banks are recovering some of the deposits they lost immediately following the collapses of Silicon Valley Bank and Signature Bank, according to Federal Reserve data.
According to the April 7 report, deposits at small banks increased by roughly $25 billion to approximately $5.371 trillion the week of March 29 from $5.345 trillion the previous week. Deposits at large banks increased by nearly $50 billion to $10.748 trillion. Deposits at all commercial banks increased by approximately $150 billion the week of March 29 to $16.119 trillion.
Regulators shuttered the California-based tech startup-focused Silicon Valley Bank on March 10. Two days later, the New York Department of Financial Institutions closed the $110 billion Signature Bank after the New York City-based commercial bank and major lender to the crypto industry faced a crisis in confidence triggered by the SVB failure. That same week, a group of 11 of the largest U.S. banks deposited $30 billion into First Republic Bank. In an April 10 regulatory filing, First Republic Bank announced its suspension of dividends on preferred stock. The status of the San Francisco-based bank has been in flux as loan values sank and cash outflows increased.
According to Morgan Stanley, the turmoil will still likely lead banks to tighten their lending standards and financial conditions. The bank said weakening corporate profits and stagflation appear increasingly likely, meaning that inflation will remain high as the economy slows and unemployment increases. According to the investment banking firm, the recent tightening of lending standards suggests the unemployment rate could rise by 2.5 percentage points in the two years.
“Regional banks’ overall profitability is likely to come under pressure, which could put further stress on the economy,” said Morgan Stanley Wealth Management Director Lisa Shalett. “Banks could see increasing competition for customer deposits from higher-yielding Treasuries, certificates of deposit and money market funds. To retain deposits, banks will likely need to increase the interest rates they pay depositors, which could squeeze bank profit margins. In addition, credit-rating agencies have recently cut their views of the banking system, which only exacerbates such margin pressures.”