The U.S. banking industry is undergoing a momentous transformation, with major banks witnessing a sharp decline in customer deposits. According to recent data reported by Yahoo Finance, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, the four largest banks in the country, have lost a staggering $262 billion in deposits compared to the same period last year. Despite this downturn, CFRA equity analyst Alexander Yokum points out that these big banks are paradoxically prevailing over smaller institutions. JPMorgan’s Q2 presentation reveals a remarkable 67% increase in quarterly profits to $14.47 billion, despite the substantial drop in deposits.
Regional banks rise amidst collapse of Heartland Tri-State Bank
At the heart of this trend lies the collapse of Heartland Tri-State Bank of Elkhart, Kansas, which recently saw its failure on July 28. However, as major banks experience a deposit flight, smaller regional banks are capitalizing on the opportunity to grow their customer base. The rise of regional banks is attributed to their willingness to pay more to attract customers, as they offer higher interest rates than their larger counterparts.
The Federal Deposit Insurance Corporation (FDIC) played a significant role in the aftermath of Heartland Tri-State Bank’s collapse. The FDIC deemed it more cost-efficient to transfer the failed bank’s assets to Dream First Bank, National Association (N.A.), another Kansas-based institution, rather than using its insurance fund to compensate customers. Dream First Bank, N.A. agreed to acquire nearly all of the failed bank’s assets and entered into a commercial shared-loss agreement on the purchased loans. This approach is expected to maximize asset recoveries by keeping them in the private sector and minimize disruptions for loan customers.
While major banks continue to weather the storm of deposit decline, regional banks have shown resilience and strategic adaptability. Notable examples include Western Alliance and Zions, experiencing an impressive 7% growth in deposits, along with First Horizon and Comerica, witnessing gains of 6.4% and 2%, respectively. These regional institutions have recognized the need to bolster their deposit bases and are willing to offer higher interest rates to attract deposits.
Additionally, some customers have chosen to explore alternative avenues for their funds. U.S. money market funds have seen a substantial influx of $623 billion in net inflows, particularly during March and May 2023. This trend comes as depositors sought higher-yield options due to the Federal Reserve’s interest rate hikes aimed at cooling the economy.
In conclusion, the U.S. banking sector is experiencing a significant shift in deposit trends, with major banks facing deposit flight. In contrast, regional banks gain ground by offering attractive interest rates to attract customers. The collapse of Heartland Tri-State Bank has further fueled this trend.
