Small US banks raise interest on deposits for fear of their escape
Small and medium-sized banks in the United States tend to raise the rates of returns they pay to depositors after the Silicon Valley bank crisis.
In the aftermath of the Silicon Valley bank crisis, depositors fled from small banks to large banks in search of safety.
Small and medium-sized US banks have lost hundreds of billions of dollars in the recent weeks following the Silicon Valley bankruptcy to their peers from major banks and to money market investment funds that offer higher returns.
And according to the newspaper “The Wall Street Journal” today, Sunday, fears of the flight of depositors prompted medium and small banks to raise the percentage of returns they pay to depositors.
“The first quarter of this year may be the most important and sensitive for banks ever,” said Managing Director and global financial services industry leader at Protiviti.
He added to the “Wall Street Journal”: “Some banks are already raising the interest rates that they pay to savers, as the average return on online savings accounts rose to about 3.75% last March, according to the indicators of Deposits Online LLC, compared to their levels of 0.5% a year ago.
One-year Online Certificates of Deposit yield an average annual return of approximately 4.75% in the US, up from less than 1% in 2022.
“Some banks seem to be trying to anticipate any potential deposit flight situation and make sure they have enough liquidity if difficulty arises,” said Ken Tomin, founder and editor of DepositAccount.com.
Concerns did not stop at small banks, but rather the largest banks in America are paying more to prevent customers from transferring their business to other places. In this context, Citigroup paid returns of 2.72% on deposits with interest in the first quarter, up from 2.1%.
These increases did not affect the net income of the banks because of the returns they receive on loans. JPMorgan’s net interest income in the first quarter rose 49% to a record $20.71 billion.
Small banks that have lost clients in the turmoil are unlikely to act, especially if they are forced to replace low-cost deposits with more expensive loans from the Fed or emergency facilities it has set up to help banks meet withdrawals.
The Federal Reserve raised interest rates at the fastest rate since the 1980s to curb inflation, prompting some customers with large account balances to abandon smaller banks in search of better returns.
“The Fed was expecting deposits to flee the banking system,” said Gerard Cassidy, an analyst at RBC Capital Markets.
Total deposits in banks in the United States decreased to $17.4 trillion last March, according to Federal Reserve data, a decrease of $312 billion compared to the beginning of the same month. Banks had more than $18 trillion in deposits a year ago.
According to the Wall Street Journal report, small banks have taken the biggest hits on deposits since the unrest began. The 25 largest US banks gained $18 billion in deposits last month, while banks of less than that size lost $212 billion. There are signs that medium-sized banks are starting to feel the pressure and are working to increase returns.
