Just several weeks ago, executives at several large and midsize banks were discussing the need to shrink swelling deposits in response to the lack of loan demand.

But data released by the Federal Deposit Insurance Corp. last week showed that increasing amounts have been leaving the banking industry. Domestic deposits fell in consecutive quarters for the first time and were down $29 billion at midyear, or 38 basis points, from Dec. 31. The lion's share of that, $24 billion, vanished in the second quarter — a record since the FDIC started tracking the data in 1992.

How can the numbers and the executives' comments square?

The remarks were anecdotal, but the FDIC's figures covered 7,830 banks — and may underscore a growing chasm between stronger and weaker banks.

When lending someday increases, some banks will find attracting new deposits harder to do.

Observers said the shrinking pie seen in the FDIC data supports the idea that consumer behavior is changing — perhaps permanently — and presents a major challenge to banks.

"People are voting with their feet," said D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte. "People may be turning away from banks due to frustration with the higher fee structure."

The industrywide second-quarter decline in U.S. deposits prompts another question: Where are they walking to? Volatility is probably keeping money out of the stock market, and economic uncertainty continues to curtail investment in real estate, observers said. The personal savings rate stood at 6% of disposable income at midyear, according to the U.S. Bureau of Economic Analysis, suggesting that the money is going somewhere other than banks.

Dan Geller at Market Rates Insight, which analyzes deposit data, said a trend has emerged favoring more-liquid products such as savings and checking accounts and money market products rather than ones like certificates of deposit that lock up money for extended periods. This makes money easier to withdraw and deposit figures more volatile.

Consumers have plenty of reasons to look elsewhere. Geller said banks, which have purged many of their higher-cost brokered certificates of deposit, are now driving down overall deposit rates, which fell 21 basis points in the first half of this year, to 0.99%.

Kevin Jacques, chairman of the finance department at Baldwin-Wallace College in Cleveland, said it is possible that depositors, in response, are moving money out of products such as CDs and into alternative investments such as bond-oriented mutual funds. "When you put money into a CD, all it is doing is sitting there doing nothing," he said.

Discontent with bank fees could be sending deposits into financial institutions such as credit unions, insurers and newer options such as PayPal, Plath said. Deposits at credit unions rose $25.26 billion, or 3.3%, in the first half of 2010, to $788.6 billion, according to Callahan & Associates Inc.

"I'm sure part of the trend is a function of increased consumer choice," Plath said.

Another factor could be continued deleveraging as consumers take better care of their finances. Geller said it is highly likely that people are trying to make bigger payments on items such as credit cards where interest rates can easily top 10%.

"People are realizing that the best investment in the current environment is to pay down their debt," he said. Banks have finally cut deposit rates low enough to shift attitudes toward deposits, he said. "Even inelasticity has its limits."

Some banks could eventually take advantage of a shrinking deposit pie, according to a report issued Tuesday by Barclays Capital. Though California, New York, Texas, Florida and Illinois account for 40% of the nation's deposits, a bigger determinant will be the growth of specific regions, the report said.

The Barclays analysts wrote that Wells Fargo & Co. in San Francisco; Zions Bancorp. in Salt Lake City; TCF Financial Corp. in Wayzata, Minn.; Synovus Financial Corp. in Columbus, Ga.; BB&T Corp. in Winston-Salem, N.C., and First Horizon National Corp. in Memphis "have the fastest-growing footprints" in terms of projected population growth over the next five years and should benefit.

By contrast, they warned that Huntington Bancshares Inc. in Columbus, Ohio, PNC Financial Services Group Inc. in Pittsburgh; M&T Bank Corp. in Buffalo; and Fifth Third Bancorp in Cincinnati "stand out on the other end" and could struggle to build deposits as their core markets rebound more slowly than others.

Plath said it may take several quarters before the impact on banks becomes clearer and it remains unclear whether the current trends will prove short-lived. "It is going to take some time to sort this outto see if we're experiencing short- or long-term phenomena," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.