Deposit Balances Decline for Second Straight Quarter

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Deposit balances declined for the second consecutive quarter, a new survey shows.

Total domestic deposit balances at institutions insured by the Federal Deposit Insurance Corp. fell by $31 billion, or 0.3%, in the second quarter, according to analysis from Market Rates Insight released Thursday. The rate of withdrawals increased from the first quarter of 2013, when customers pulled out $20 billion, or 0.2%.

However, some types of deposits rose in the second quarter. CDs with terms of three months or less increased by $26 billion, or 9.4%, while money-market account balances rose by $50 billion, or 1.1%, Market Rates Insight said.

The decline in balances could lead to an uptick in interest rates as banks compete for deposits, according to Dan Geller, executive vice president at Market Rates Insight.

"Financial institutions will need to start increasing interest rates on deposits in order to maintain current deposit levels and to increase liquidity ratio as mandated by Basel III," Geller said in a news release.

The decline in deposits over the last two quarters comes after six straight years of increasing balances. From July 2007 through July 2013, domestic deposits rose to $9.4 trillion from $2.7 trillion, a 40% increase, Market Rates Insight said.

That increase occurred despite a decline in deposit interest rates to their lowest level ever. The average interest rate on a deposit account was 0.28% as of July 2013, down from 3.28% in July 2007.

U.S. banks earned a total of $42.2 billion in the second quarter, up 23% from the second quarter of 2012, the FDIC said Thursday. It was the second consecutive quarter of record earnings.

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