Since the market chaos of fall 2008, a surge of deposits has reshaped the banking industry's funding base, but the repositioning has been uneven across institutions in different asset classes.

And once rates begin to rise, market forces are set to erode the apparent gains of insulation from forms of borrowing that are riskier for flights of liquidity.

The portion of bank liabilities made up of retail deposits — that is, deposits in domestic offices excluding time deposit accounts with balances of $100,000 or more — grew 8.9 percentage points from Sept. 30, 2008, to 57.3% at Dec. 31, 2009, according to data from the Federal Deposit Insurance Corp.

The influx displaced a range of wholesale alternatives, some of which demonstrated exceptional fickleness during the financial crisis. Including a large dip in the fourth quarter, federal funds and repurchase borrowing declined 2.4 points during the period, to 5.2%. Large time deposits fell 1.7 points, to 8.8%. Federal Home Loan bank advances and other borrowings, including unsecured debt, also diminished in importance.

Large banks account for most of the shift (see accompanying chart). Among institutions with more than $25 billion of assets, retail deposits grew 10.7 points, to 52.4%. Among institutions with less than $25 billion of assets, which already used retail deposits for a greater proportion of their funding, such holdings grew 3.4 points, to 68.8%, and by contrast with their bigger competitors, large time deposits also rose 0.4 point, to 15.3%.

Several forces have propelled the deposit buildup, including the massive amounts of liquidity the Federal Reserve has pumped into circulation, a flight to safer instruments among savers (and a bigger safety net for depositors as a result of expanding the balance limit for insurance) and regulatory pressure and self-interest that prompted institutions to seek more dependable funding.

Several regulatory proposals, including the Tarp tax, seek to lift the floodgates to hold in the tide of deposits. The administration has said that the Financial Crisis Responsibility Fee, an annual 15-basis-point levy it envisions on liabilities, would exclude retail deposits in part because they are stable. Similarly, a provision in the House financial services reform bill would expose secured creditors to additional losses in a seizure, pushing up prices demanded for such borrowing and steering banks to alternatives.

Still, the durability and benefits of the funding shift are likely to be challenged. In a winter publication warning about liability sensitivity, particularly at small and midsize institutions, the FDIC noted that, when short-term interest rates inevitably increase, competition, including from nonbank savings products, has always eroded banks' ability to hold down the cost of core deposits and that cash is likely to leave the system in search of higher yields.

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