'Most vulnerable' US banks lost US$1 trillion in deposits in a year

JPMorgan Chase & Co analysts estimate that the "most vulnerable" US banks are likely to have lost a total of about US$1 trillion (about RM4 trillion) in deposits since last year, with half of the outflows occurring in March following the collapse of Silicon Valley Bank.

The team of JPMorgan analysts led by Nikolaos Panigirtzoglou did not name any of the banks they categorised as "most vulnerable" or say how many they included in this group.

"The uncertainty generated by deposit movements could cause banks to become more cautious on lending," they wrote.

"This risk is heightened by the fact that mid- and small-size banks play a disproportionably large role in US bank lending," they added in a note dated March 22.

Regulators closed SVB and Signature Bank earlier this month, marking the second and third largest failures in US banking history, respectively.

The speed at which customers withdrew their money from the two banks sparked concern of bank runs spreading to other institutions, prompting US authorities to backstop their deposits.

The failures amplified worries among customers who rushed to move their money to bigger banks that were perceived to be safer and hold a greater share of insured deposits.

Of the US$17 trillion of total US bank deposits, nearly US$7 trillion are not insured by the Federal Deposit Insurance Corp (FDIC), the JPMorgan analysts wrote.

"Fed rate hikes have been inducing a deposit shift via another channel: via creating losses in banks’ bond portfolios which in turn made depositors less comfortable with keeping uninsured deposits in banks with large unrealised losses on their bond holdings," they wrote.

A government guarantee on deposits could help stem the outflows from small and regional lenders, Panigirtzoglou wrote.

But that possibility appeared less likely after US Treasury Secretary Janet Yellen said on Wednesday that she was not considering such a proposal, which would require congressional approval. Bank risks were being reviewed on a case-by-case basis, she said.

Rising US interest rates, and banks' sluggish moves to raise the rates they pay depositors, have also contributed to the outflows in the last year, the JPMorgan analysts said.

Out of the US$1 trillion in deposits that were pulled out of the most vulnerable US lenders, half went to government money market funds, while the other half landed at larger US banks, the analysts wrote.