Search
Close this search box.

Wealth Deposits: Instability Grows. What Does The Future Hold?

Rising rates and bank failures have transformed deposits held in wealth management, brokerage and private banking from perceived as mostly stable to unnervingly volatile. The substantial wealth built up in deposit accounts following the global financial crisis earned near-zero rates. Then, while wealth managers saw a preview of deposit runoff in 2018-19, the onset of the pandemic prompted the Fed to again decrease rates to zero, returning wealth deposits to stable growth. As rates started rising in 2022 at a much faster pace, outflows occurred faster than the last cycle. And on March 10 the system shuddered when two major banks failed, accelerated by a digital run on uninsured deposits.

While wealth deposits are still a source of significant value to financial institutions, assumptions that many professionals may have held about them are eroding. Where were we before March 10, what’s happened since, and where do we go from here?

How Did We Get Here?

As rates began to rise and consumers came out of their pandemic-induced isolation, deposits that had surged began to shrink. Since January 2022, wealth and private banking deposits have declined by 20%, and 40% of the original surge in overall deposits has left the banking system in the last 10 months. The deposits that have remained have been seeking rate, as average portfolio rates now exceed 1.50%, with blended acquisition rates surpassing 3.00% for savings and money market demand accounts (MMDA). And cash has been flowing into money market funds (MMF) — by more than $335 billion between April ‘22 and February ’23. Significantly, but perhaps underappreciated in more stable times, more than three-quarters of wealth deposits were uninsured in mid-March. (See Figure 1.)

Figure 1: Mix of Insured vs. Uninsured Deposits (Proxy View)

Source: Curinos Deposit Analyzer Data

Bank Failures Shine A Light On Uninsured Deposits

Immediately following the events in March, a significant number of wealth and commercial deposits, mostly uninsured, took flight. Wealth deposits skidded by 2% in the first week — perhaps not a big change in aggregate, but enough to get the attention of many FIs. While in commercial deposits the shift in outflows was short-lived, wealth deposits have continued to run off at a higher level. Weekly deposit outflows have continued at double the pace post Silicon Valley Bank (SVB), compared with the pace from January 1 to March 10. 

Throughout this period, insured deposits, not surprisingly, held their own, as indicated by the behavior of non-wealth consumer deposits, which showed almost no volatility. (See Figure 2.) Adding to the wealth flight, however, was interest in MMFs, which was originally spurred by rising rates but accelerated with the receivership of SVB. Between March 10 and May 9, inflows to retail MMFs grew by $134 billion, an increase of 109%, matching the growth rate of institutional inflows. (See Figure 3.)

Figure 2: Average Weekly Deposit Growth by LOB (% of Previous Week Balance)

Note: 1/1 — 3/25 data updated with additional participants; Pre-SVB averages are calculated from week ending 1/7 to week ending 3/11 | Source: Curinos Deposit Analyzer Data

Figure 3: Money Market Fund Flows March 10 to May 9

Source: Crane Data as of May 10 2023

The rise in flows to MMFs, combined with a meaningful increase in exception pricing, suggests that the rate sensitivity of wealth deposits has increased even further. In examining their banking relationships because of concerns over concentration and insurance risk, clients in many cases are finding that their rates are below what they could be receiving elsewhere. In these cases, customers are either asking for exception pricing or moving balances to achieve higher yield — either off balance sheet to MMFs or to a competitor.

What Can Be Done Now?

Based on previous rate cycles, Curinos’ position is that interest expense will continue to rise even if the Fed, as expected, decides to apply the brakes to its rate increases in the coming months. With this in mind, we believe there are three imperatives that FIs should consider in managing their wealth deposits.

Better understand existing customers and their deposits. This imperative begins with inductive segmentation, one based on customer needs and behaviors and characteristics such as primacy indicators, relationship, risk and tier. To test relative balance stability and repricing, betas and balance performance need to be measured for each segment against the broader market. There are challenges to sound measurement, however, that include these non-controllable factors:

  • High volatility in balances, including volatility driven by non-rate levers
  • False negatives — balances that remain stable despite a change in rate
  • High variance in pricing behavior at the customer or institution level that makes constructing meaningful industry curves difficult
  • Non-rate-based factors, such as investment goals and life stage, that drive cash allocation and risk
  • Imperfect transparency into “off-us” bank relationships and held-away investments

Better understanding wealth customers can include elasticity modeling that accounts for their nuances. Curves can be built at the segment level based on observed behaviors and market benchmark rates. This can yield results that are intuitive and directionally sound while reducing noise from mismeasuring elasticities of individual customers. But because this approach depends on the validity of the initial inductive segmentation, which is susceptible to non-controllable factors, its downside is that idiosyncrasies of individual client behavior within segments can get lost in the averages.

Forecasting and valuation of deposits need to be more accurate. This imperative entails deconstructing the flows by factors that are controllable (largely the impact of rate) and non-controllable. Potential controllable factors include yield-seeking rotation, such as checking and sweep accounts to savings or CD deposits to MMFs. Uncontrollable factors in this context relate to consumer behavior. They include spending and inflation, which collectively represent more than 50% of all checking runoff; debt repayment, especially of variable-rate loans; and the perceived safety and security of diversifying between financial institutions.

Deposit forecasting can also mean scenario modeling driven by macroeconomics, competitive behavior and customer targeting. Valuation and funds transfer pricing (FTP) can also play a role as long as they are realistic and based on deposit characteristics through a full rate cycle.

The effects of today’s environment on broader enterprise objectives, however, challenge conventional FTP. (See accompanying article in this issue, “Funds Transfer Pricing Is Moving To A More Customer-Centric Approach.”) Given rising rates and increased customer churn, the weighted average life (WAL) for deposits is decreasing, signaling diminishing deposit quality. Concurrently, the flattening of the yield curve means longer-term stable deposits aren’t receiving incremental credit, which further compounds banks’ efforts to pursue and accurately measure high quality deposits. For asset/liability management (ALM), these dynamics raise important questions:

  • Should behavioral assumptions be reviewed and considered more often for updating in FTP and ALM?
  • Given the trade-off between improving the accuracy of risk management and supporting the businesses’ ability to compete for deposits, how should the connection between deposit analytic assumptions in FTP and ALM be managed?
  • What is the right governance around FTP credit overlays for deposits?

Product design needs to incent long-term value. This final imperative starts with product design that’s distinctive, with features that promote primacy and make the relationship stickier. Most cash management and money management services, however, have become table stakes, thanks to the mature presence of the leading private banks. These include transfers between family members, wire transfers between institutions, international wires and cash access, deposit sweeps and white glove service.

Fortunately, there are several white-space product-led growth strategies that have been shown to drive not only acquisition but also deeper, higher-value client relationships.

  • Securities-backed credit offers with more seamless linkage to deposits
  • Targeted personal lending offers to refinance debt and grow new segments (e.g., student loans for recent medical school graduates)
  • Mortgage refinance offers tied to new deposits and/or incremental investments
  • Deposit and/or fee pricing offers on deeper or new relationships through incentives that focus on the level of the relationship, engagement or advice
  • Credit card and/or payments propositions that redefine primacy in the wealth segment, e.g., through managing cash inflows and outflows alongside investment and credit allocation

Changing Perceptions, Changing Priorities

In today’s environment of rising rates, shrinking net interest margins, diminishing deposit quality and expanding choices for well-heeled consumers, the perception that FIs may have held about wealth deposits has either changed, or it needs to. Their perceived value, while still considerable, isn’t what it once was. Bedrock reliability has given way to relative volatility, and to respond, institutions should better understand their customers, hone the forecasting and valuation of their deposits and fashion products that exhibit the distinctiveness to ensure long-term value.

  • Author
    • Adam Stockton

      Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum.

      Managing Director
  • Want to go further?

    Contact us to learn more about how Curinos can help you navigate today and prepare for tomorrow.