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During the second quarter, an unexpected trend emerged in the banking sector as the industry’s giants, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, experienced significant declines in deposits, losing a combined net amount of $262 billion compared to the previous year. Meanwhile, regional banks thrived, attracting depositors and witnessing a rise in their stock prices over the past two weeks. This divergence marks a reversal of the previous trend, which saw large inflows to major banks and crippling withdrawals at regional banks following the failures of Silicon Valley Bank, Signature Bank, and First Republic. The shift is driven by regional banks’ need for deposits, leading them to offer higher rates, while the industry titans leverage their scale and pricing power to keep their rates lower.

Deposit Decline for Major Banks: JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, the four biggest banks in the US, experienced a net loss of $262 billion in deposits compared to the same period the previous year. During the transition from the first to the second quarter, three of these banks witnessed customers pulling out $62 billion.

Regional Banks Rebound: In contrast to the major banks’ deposit decline, many regional banks saw deposits returning and, as a result, received a positive response from investors, leading to higher stock prices in the past two weeks.

Reasons Behind the Reversal: The shift in deposit trends is due to regional banks’ current need for deposits, causing them to offer higher rates to attract customers. In contrast, major banks can afford to maintain lower rates due to their scale, pricing power, and diverse funding sources. Industry experts consider the deposit outflows from major banks as a sign of strength for the regional institutions.

July Continues the Trend: The deposit divergence has persisted into July, with the largest banks experiencing a $78 billion drop in deposits during the week ending July 12, the most significant decline since March 22, during the peak of the regional banking crisis. However, both big and small banks showed slight increases in deposits during the week ending July 19.

Money Market Funds Attract Deposits: As customers seek higher yields, some money is flowing out of the banking system altogether, finding its way into US money market funds, which have seen net inflows of $623 billion. Notably, $28 billion flowed into these funds during the week ending July 26.

Impact of Rising Interest Rates: The current shift in deposit trends is part of a broader struggle for banks of all sizes, influenced by an aggressive Federal Reserve campaign to lower inflation. When interest rates were historically low during the early part of the pandemic, banks accumulated significant deposits. However, as the Fed raised rates to cool the economy, customers sought out higher-yielding alternatives, leading to the first year-over-year deposit decline for all banks in the second quarter of 2022.

Regional Banks’ Gains and Losses: The first quarter of 2023 saw a historic loss of $472 billion in deposits for US banks, marking the fourth consecutive quarter of industry outflows. During this period, certain regional banks, like First Republic, experienced significant declines, while others, such as Western Alliance and Zions, witnessed notable increases in deposits. The trend continued into the second quarter, with Western Alliance, First Horizon, and Comerica showing notable gains in deposits.

Challenges for Smaller Banks: While regional banks have been aggressive with their deposit rates, offering higher yields, this move has impacted their profitability. Some smaller banks have revised down their revenue and lending profit estimates for the year. However, not offering competitive rates risks losing depositors, which poses a challenging situation for these institutions.

The surprising deposit trend during the second quarter shows regional banks gaining momentum with increasing deposits, while major banks experience declines. This reversal is driven by regional banks’ willingness to offer higher rates to attract depositors, making them the current winners in the deposit battle.