Even before the collapse of Silicon Valley Bank, investors and depositors had already started shifting their money from banks into more lucrative funds, writes Barbara Pianese.

The chief fear across the banking sector is currently whether lenders have enough liquidity to survive sudden deposit outflows.

The worries started in March after the collapse of US-based Silicon Valley Bank (SVB) raised questions about the security of deposits in regional banks. A bank run led to a third of the bank’s deposits being withdrawn in a single day, preceding its collapse on March 10. Investors reacted by shifting their cash into money market funds.

The Federal Reserve moved quickly to set up a new facility to boost liquidity in the banking sector, made guarantees on all deposits at SVB and Signature Bank, and brokered the infusion of deposits from other banks into First Republic Bank.

Since then, there has been a debate in the US about the opportunity for an across-the-board expansion of the deposit protection scheme. 

In the UK, Bank of England governor Andrew Bailey and chancellor Jeremy Hunt raised the prospect of higher limits on deposit insurance. The current £85,000 limit is well below the $250,000 of protection afforded to most US depositors. However, it is unlikely that the UK will provide an unlimited state guarantee on bank deposits, according to the chancellor. 

There is also change afoot in the EU. Brussels is set to unveil plans to better protect taxpayers from bank failures by strengthening its rules for struggling lenders, according to press reports. 

The European Commission is working on legislation that will make it easier to transfer depositors’ cash to healthy institutions from troubled lenders. The institution is also looking to make it more difficult for governments to hand over precautionary cash to beleaguered lenders. 

Notwithstanding recent developments, before the SVB collapse, huge amounts of money were already flowing out of bank deposits and into higher-yield money market funds. Rising interest rates have been beneficial for lenders around the world, but now banks are under increasing pressure to in turn offer higher interest rates to their customers. 

Things have been changing fast in deposit dynamics at banks worldwide. The Covid-19 pandemic had resulted in a rapid and sustained growth in aggregate bank deposits thanks to historically high savings rates. In April 2020, the personal savings rate skyrocketed from around 8% to nearly 35%. Total deposits at domestic commercial banks rose by more than 35% after the end of 2019 and stood at around $18tn as of the fourth quarter of 2021. 

From the late 1970s to 2000, bank deposits had tended to grow at a slower pace than that of nominal gross domestic product, according to the Federal Reserve. Commercial banks then started to fund their growth in loans and securities holdings through other types of liabilities in addition to deposits.


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