This Month In Commercial Banking
In the immediate aftermath of the failures of Silicon Valley Bank (SVB) and Signature Bank (SBNY) in March, commercial deposit markets experienced higher volatility, flight to perceived quality and an increase in flows to money market mutual funds. As measured by commercial deposit growth, the week following the failures saw more than 10 percentage points in divergence between the top and bottom half of regional banks. (See Figure 1.)
Figure 1: Average Weekly Commercial Deposit Growth (% of Previous Week Balance)
Since then, what had been acute volatility has normalized for most banks. But the structural pressures on total deposits, driven by the combination of higher rates and quantitative tightening, have continued. These pressures had already contributed to a shrinking pool of total commercial deposits, and client behavioral changes are now adding to the competition for balances and upward pressure on rates. The result: commercial deposit portfolios are now squarely on the front lines of the fight for bank profitability.
As of April, through-the-cycle betas on interest-bearing DDAs had reached 50%, and betas on money market deposit accounts (MMDA) had reached 60%. Earnings credit rate (ECR) betas are currently only 9%, but with ECR balances down by more than 30% year over year, the real challenge is in remixing, which has become costly. Many of those balances are moving to much more expensive interest-bearing DDA and MMDA accounts, and collected fees often offset only a portion of the difference.
These challenges are expected to continue. As noted in Curinos’ recently published Commercial Deposit Analyzer Executive Summary, 76% of bankers expect recent market events to accelerate competition for commercial deposits and drive betas higher. And over half expect to see an acceleration of commercial deposits into money market mutual funds and other investments. (See Figure 2.)
Commercial deposits still represent a vital and valuable source of funding for banks, and they are an integral piece of a full primary commercial customer relationship. But with more money in motion and intense competitive pressures, bankers will need to be nimble, proactive, and equip themselves with the data and tools needed to navigate what is, at the moment, a particularly complex market.