Why banks are most worried about rich users right now

Investors keep going to money market funds in search of higher returns, which makes it hard for banks to keep their high-balance account users.

This week, money-market fund assets hit a new all-time high. This is because investors are still interested in rates above 5%, even though the Federal Reserve seems determined to keep rates high for a while.

The Investment Company Institute says about $14 billion was put into money-market funds in the week ending on August 30. The total assets went up from $5.56 trillion the week before to $5.58 trillion. It is the most significant number since records began to be kept in 1992.

This isn’t good news for banks, which have been fighting to keep their depositors for the past year, especially after three large lenders went bankrupt in the spring.

The Federal Reserve says that since the beginning of January, savings at all US banks have dropped by $371 billion, while money market funds have grown by more than $769 billion. Those losses slowed down over the summer, but since the end of June, deposits at bigger banks have been going down.

The rich are still the ones who are most likely to leave. According to statistics from Curinos, deposits from wealth management accounts and corporate accounts have both dropped by nearly 13% this year through July. However, both types of deposits have been stable since July. The information for August has yet to be ready.

In contrast, only 1.8% of mass-market customer accounts have gone down.

“Ironically, the most worrisome bank client is the very liquid high net worth client,” Tim Coffey, a bank expert at Janney Montgomery Scott, told Yahoo Finance. “Households with less money in the bank and less money coming in are the least worrying.”

There is a lot of competition to keep these depositors in an industry already struggling with high interest rates, rising costs of borrowing, and falling profits.

In the past few weeks, both Moody’s Investor Service and S&P Global lowered the credit ratings of a number of mid-sized lenders. This means that buyers of bonds will now want a bigger return on their investments.

Larger lenders are also told by regulators that they need to set aside more capital and, in some cases, release more long-term debt to cover any possible losses. Another worry is that rising credit card debt and late payments could lead to significant losses soon.

Since March, when the industry’s problems were at their worst, US bank stocks had their worst month of the year in August. The KBW Nasdaq Bank Index (BKX) fell by 8%, and the KBW Nasdaq Regional Bank Index (KRX) dropped by 9%.

Moving Markets

The Fed’s aggressive effort to slow inflation by raising interest rates started putting pressure on the industry in 2022. This caused the value of bonds held by many institutions to drop, and many institutions had to pay more to get or keep deposits.

That, in turn, has hurt income and made it more likely that there will be cash flow problems. In the spring, Silicon Valley Bank, Signature Bank, and First Republic all went bankrupt because a lot of people withdrew their money at once.

S&P said last month that many savers have moved their money into accounts with higher interest rates. This has caused banks’ funding costs to go up. “Because of the drop in deposits, many banks have less cash on hand, and the value of their securities, which is a big part of their cash on hand, has gone down.”

In the first quarter of the year, deposits at banks guaranteed by the FDIC fell by 2.5%. This was the biggest drop in deposits in a quarter since the regulator started keeping track in 1984. The decline was much more significant for uninsured savings, which fell 8.2% during the same period.

“If you’re a bank and you don’t offer a competitive rate, there’s a chance that customers will go elsewhere,” said Scott Sieffers, a bank analyst at Piper Sandler.

As people looked for safety during the chaos of the spring, they put money into bigger banks. But then, they too started losing savings to smaller banks with higher rates or to money market funds. And it took a lot of work to keep people who had more money.

During the second quarter, deposits left the wealth management units of JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC), and Citi (C). Both JPMorgan and Wells Fargo had drops of 11%, a lot more than the amount of deposits they lost during the same period.

In the middle of August, these four big banks came out with new “specials” on short-term CDs in an effort to keep their rates competitive. A 6-month CD from JPMorgan Chase could earn up to 5% per year.

Smaller banks might not be able to handle this increase, said Ken Tumin, a senior expert at LendingTree who keeps an eye on bank rates.

“They’re being squeezed,” Tumin said.


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