Deposits Drop by 1% At 300 Largest Banks

Deposits at the nation's top 300 banks fell by about 1% in the six months ended June 30, the first slippage in five years.

The deposit decline was caused in part by consumers fleeing to mutual funds in search of higher interest rates. Also contributing were corporate treasurers, who kept their balances to a minimum and in some cases abandoned shaky U.S. banks for foreign institutions that they felt were more stable.

"There is no question that the banking sector has serious problems, and one of the signs is a contraction in deposits," said Alan C. Lerner, managing director and economist at Bankers Trust New York Corp.

"There has been a slow run on banks, with corporations reassessing the safety and soundness of their financial institutions," added Charles Peabody, an analyst with Kidder, Peabody & Co. "It's dangerous if it persists."

Highlights of Survey

The $21 billion deposit slide, to $1.681 trillion from $1.702 trillion, emerged in the American Banker's semiannual survey of the top 300 U.S. commercial banks. The deposit totals do not take into account interest paid during the six-month period.

For many banks, the decline in deposits isn't especially worrisome. In fact, with the economy sluggish, many bankers have more deposits on hand than they can profitably lend out.

"For some institutions, the decline in deposits in not all that serious," said Mr. Lerner. "They are waiting for opportunities to make profits and until then, there is no point in taking on more liabilities."

But the decline in deposits may hurt banks when the economy bounces back. With less money on hand, banks have less to invest. So while a loss in deposits may not be trouble right now, said Mr. Lerner, it does impair their opportunities to make profits in the future.

Flight to Mutual Funds

While it is hard to pinpoint the precise cause of the deposit drain, a flight by consumers to mutual funds certainly played some role. As bank deposits were slipping in the six-month period, money market funds outside the banking industry gained $70 billion from investors, according to the Investment Company Institute, a Washington-based trade association.

"Banks are getting stingy on the deposit rates they are willing to pay," said Greg Root, head of Thomson Bank Watch, an American Banker affiliate. "So there is some movement to money-market funds for the interest rate consideration." On top of that, in a sluggish economy, consumers typically save less.

Some banks appear to be in no rush to boost deposits. Take Bank of America, for example. Deposits at the San Francisco unit of BankAmerica Corp. declined $400 million, a small portion of the $75 billion in deposits. But the bank said it has no special marketing program to win back depositors.

Some Core Deposits Rising

Stuart Windt, executive vice president, at Marine Midland said the drop in deposits is not a cause for worry. The unit of HSBC Holdings had shed about $3 billion in assets over the past 12 months. Over a longer period, it has shed most of its corporate accounts as well.

For example, Marine Midland has cut Eurodollar deposits to $200 million from $1 billion. But core deposits - basically consumer deposits - have increased slightly, to around $13 billion - nearly all of the bank's total deposits.

"The risk to banks is that if this recession continues, consumers can pay down loans with their deposits, and we lose both ways," he said.

A Search for Havens

At the same time, traditionally strong banks such as First Wachovia and Valley National Bank of Arizona have seen deposits rise - an indication that depositors are moving their accounts to dependable institutions. Other banks, including CoreStates Bank and Mellon Bank, reported growth in deposits by acquiring other banks.

Some big banks showed especially large deposit declined. Chase Manhattan, for example, lost nearly $3 billion in deposits from June 31, 1990, to June 31, 1991. First Chicago Corp.'s First National Bank of Chicago reported deposits declined about 20%, to $22.7 billion from $28.2 billion during that same period. Even traditionally safe Republic New York Corp.'s Republic National Bank of New York lost $3 billion of $17 billion in deposits.

As a group, 12 of the top 20 banks saw deposit declines in the period.

Mr. Peabody and others believe that the deposit slide was caused largely by corporations. Indeed, recent data from the St. Louis Federal Reserve Bank indicate that certain corporations withdrew $20 billion in large deposits between June 30, 1990, and June 30, 1991.

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.