Deposit Outflows are Forcing Some Banks to Play Defense

Source: American Banker

A growing outflow of deposits is starting to cause headaches for some banks, forcing them to play defense in order to maintain enough cash to make loans.

The quickly shifting picture — an effect of the Federal Reserve's rapid interest rate increases — is prompting many banks to raise their deposit rates to prevent customers from leaving for higher-yielding alternatives.

Some depositories are also filling in the gaps by turning to costlier options, such as the brokered deposit market or the Federal Home Loan Bank System, to fund their loans.

The actions will take a bite out of banks' earnings in the coming months, raising their funding costs and limiting how much they can profit from the higher rates they're charging on loans. The current environment marks a sea change from what banks experienced for much of the pandemic — a deposit glut as consumers and businesses built up large cash buffers.

Some banks have been more successful than others in keeping deposit costs down. But all of them are realizing that they can no longer sit still, and will instead have to fight to keep deposits, said Matt Pieniazek, president and CEO of Darling Consulting Group.

That's because inflation has prompted the Fed to hike interest rates back to 2008 levels, which has led to interest rates on some investments, such as money market funds and Treasury securities, that are more attractive than lower-yielding deposits.

With the Fed's benchmark rate at almost 4%, it will be "hard to tell your customer that they deserve" to get paid just above 0% for their savings, said Chris McGratty, head of U.S. banking research at Keefe, Bruyette & Woods.