Threats always seem more real when you can put a number on them, and that's just what's happening with banks and interest rates.
While Federal Reserve watchers sought to read the tea leaves Wednesday about its monetary policy plans, banks are already preparing for the fallout large outflows of deposits next year as the Fed continues tapering and likely raises short-term rates.
Most executives at big and regional banks have told analysts and investors in the last couple of months that they expect to see deposit runoff when rates rise and customers look for better returns on their cash holdings inside and outside the banking system. Some have provided estimates of the outflows, and others are being pressured to do so.
JPMorgan Chase expects the bank could experience outflows of $100 billion, or about 7.8% of its deposit base. M&T Bank in Buffalo, N.Y., could see deposit runoff of about $6 billion, or 8.6% of its base.
The trend could mean banks lose a low-cost source of funding for loans as demand for them strengthens, but it could also help others drain excess liquidity.
Either way it has bankers on edge.
"We are concerned about deposit flows generically across the industry," Bill Demchak, the chairman and chief executive of PNC Financial Services Group, said during a July 16 conference call. "As the Fed shrinks its balance sheet, it is going to pull deposits out of the industry."
Many banks would prefer to hold on to as much of their low-cost, core deposit base as possible. That will help them take advantage of higher rates, when they can make more profit on the deposit-loan spread.
"Low-cost deposits are the key to higher net interest margins," said Michael Lesler, the president and CEO of the $624 million-asset Bancorp of New Jersey in Fort Lee. "You absolutely want to keep as many of those deposits as you can."
Additionally, regulators have proposed a liquidity coverage ratio, which is intended to make banks hold adequate liquidity in the event of another financial crisis. That could also force banks to try to preserve more of their deposit base.
On the other hand, some institutions are awash in liquidity and may not try to chase customers by offering higher deposit rates to compete with rivals.
"Given the enormous amount of liquidity there is in the system deposit rates [will] probably lag somewhat as overall rates go up," Aleem Gillani, the chief financial officer at SunTrust, said during a July 21 conference call.
"Some banks are so flush with cash right now, that it may be a good thing" for some to see big deposit outflows, says Becky Gersonde, vice president at Heber Fuger Wendin, an asset management firm in Bloomfield Hills, Mich.
JPMorgan is projecting the entire banking system to see about $1 trillion of liquidity unloaded from the system when the Federal Reserve Board ends its quantitative easing program and ultimately raises short-term rates, CFO Marianne Lake said during the Morgan Stanley Financials Conference on June 11.
Within the industry, it's the large money-center banks, like JPMorgan and Bank of America, and trust banks like Bank of New York Mellon, that are most likely to see significant waves of deposit runoff, says Marty Mosby, an analyst at Vining Sparks.
The biggest banks "have more institutional and corporate deposits, which are more impacted by the Fed's efforts to drain excess liquidity," Mosby says.
Regional banks, on the other hand, have more core deposits from retail and small-business customers and may not see as much outflow, Mosby says.
The $65 billion-asset Comerica, in Dallas, and $21 billion-asset Webster Financial, in Waterbury, Conn., both estimated potentially lower rates of deposit runoff than their larger rivals JPMorgan and M&T. Comerica estimated runoff of between $3 billion and $6 billion, with $3 billion representing about 5.6% of its deposit base. Webster projected $760 million of runoff, or about 5% of its deposit base.
Numerous other banks declined to provide estimates of their deposit runoff, when asked about the matter by analysts during second-quarter conference calls. A few used that line of questioning to boast about their low-costs of funding and high levels of core deposits.
"Our deposit franchise will outperform competitors because of the nature of the kind of deposits we have and the amount of core deposits, especially the amount of retail core," John Stumpf, CEO of Wells Fargo, said in response to such a question. "I think we will surprise ourselves on how well it's going to do."