Why wealthy customers are the ‘most worrisome’ for banks right

Money-market fund assets reached a new all-time high this week as interest rates above 5% continue to attract investors at a time when the Federal Reserve appears determined to keep rates elevated for some time.

About $14 billion poured into money-market funds in the week through August 30, according to data from the Investment Company Institute. Total assets reached $5.58 trillion, versus $5.56 trillion the previous week. It is the highest total since the data was first collected in 1992.

This is not great news for banks that have been struggling to hold onto their depositors for the last year, especially since the failures of three sizable lenders in the spring.

Since the beginning of January deposits at all US banks have fallen by $371 billion, according to data from the Federal Reserve, while money market funds have risen by more than $769 billion. Those outflows slowed during the summer, but deposits are still down for bigger banks since the end of June.

The greatest flight risk is still from the wealthy. Deposits from wealth management and corporate accounts have both fallen nearly 13% so far this year through July, according to data provider Curinos, although both stabilized during the month of July. August data is not yet available.

Mass-market consumer accounts, by comparison, have fallen just 1.8%.

“Ironically, the most worrisome bank client is the very liquid high net worth client,” Tim Coffey, a bank analyst with Janney Montgomery Scott, told Yahoo Finance. “The least concerning are the lower balance, lower income households.”

The intense competition to keep these depositors is one of many challenges facing an industry roiled by high interest rates, rising funding costs, and eroding profitability.

In recent weeks, Moody’s Investor Service and S&P Global each downgraded credit ratings for a number of mid-sized lenders, meaning debt investors will now expect a bigger yield for holding their bonds.

Larger lenders also face new demands from regulators to set aside more capital and in some cases issue more long-term debt to absorb potential losses. Another concern is that rising credit card debt and delinquencies could lead to outsized losses in the near future.

US bank stocks ended August with this year’s worst monthly performance since march, at the height of the industry’s turmoil. The industry’s KBW Nasdaq Bank Index (^BKX) tumbled 8% while the KBW Nasdaq Regional Bank Index (^KRX) fell 9%.

‘Flight risk’

The pressure on the industry started in 2022 with the Fed’s aggressive campaign to cool inflation with higher interest rates, which has in turn lowered the value of bonds held by many institutions and forced many institutions to pay more to attract or keep deposits.

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That, in turn, has lowered profits and heightened the risk of liquidity problems. Silicon Valley Bank, Signature Bank and First Republic failed in the spring largely because depositors pulled their funds in a mass exit.

Silicon Valley Bank on the day it was seized by regulators in March. (AP Photo/Jeff Chiu, File) (ASSOCIATED PRESS)

Many depositors have “shifted their funds into higher-interest-bearing accounts, increasing banks’ funding costs,” S&P said last month. “The decline in deposits has squeezed liquidity for many banks while the value of their securities — which make up a large part of their liquidity — has fallen.”

Deposits at FDIC-insured banks fell 2.5% in the first quarter of the year, the steepest quarterly drop since the regulator began collecting the data in 1984. The drop for uninsured deposits was much deeper; they fell 8.2% for the same period.

“If you’re a bank and you’re not offering a competitive rate, there’s some flight risk,” Scott Siefers, a bank analyst for Piper Sandler, told Yahoo Finance.

Bigger banks first benefitted from the chaos of the spring with deposit inflows as customers sought safety. But then they too started losing deposits to smaller banks offering higher rates or to money market funds. And wealthier customers proved difficult to keep.

JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Citi (C) reported deposit outflows within their wealth management divisions during the second quarter. JPMorgan and Wells Fargo had 11% drops, far more than their total deposit outflows for the same period.

A JPMorgan branch in Manhattan. REUTERS/Andrew Kelly (Andrew Kelly / reuters)

In the middle of August, these four giant banks issued new short term CD “specials” in a bid to stay competitive on rates. JPMorgan Chase offered up to a 5% annualized yield for a 6-month CD.

That increase will add to the pressure on smaller banks that might not be able to respond, said Ken Tumin, a senior analyst with LendingTree who tracks bank rates.

“They’re definitely being squeezed,” Tumin added.

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