Bankers may be overly optimistic if they expect to recapture deposits lost to mutual funds, says the research director of M.A. Schapiro & Co.

Eugene J. Sherman thinks banks may never regain lost deposits, in part because they're helping to push customers toward alternatives.

Though low interest rates clearly got the ball rolling, Mr. Sherman maintains that bankers have exacerbated the deposit outflows by turning customers on to mutual funds and other uninsured investments.

The banks are "abetting" the market forces by saying, "we don't have to work hard to retain these deposits," Mr. Sherman said.

Deposit Loss Accelerated

By offering mutual funds in bank lobbies, bankers are "accelerating the diminution of core deposits by adding to the market forces," he added. By aggressively lowering rates paid on deposit accounts, banks are forfeiting part of their franchise, Mr. Sherman said. Offering mutual funds to take up some slack just increases the loss, he maintained.

Bankers who hope to rebuild deposits when loan demand grows have anguished over the slow outflow to alternative investments.

From July 1992 to July 1993, mutual fund deposits have grown 20.2%, compared with 1.5% for total deposits at domestic commercial banks.

The difference between mutual fund assets and deposits, $758.6 billion in July 1992, had closed to $483.7 billion this July.

Mr. Sherman expressed skepticism over the idea that offering mutual funds is a means to maintain customer loyalty.

He claims banks are making it too easy for customers to put money in mutual funds. Educating customers about alternative investments will make it difficult to steer them back into deposits, he said.

Comfortable with Investment

Despite his skepticism, Mr. Sherman said that market forces alone might make it inevitable that banks will offer alternative products themselves.

"People are becoming increasingly comfortable with the creditworthiness of mutual funds," he added.

Not everyone agrees.

"I would not view mutual fund deposits as a complete substitute for bank deposits in terms of liquidity," said Mark Wanshell, an economist at J.P. Morgan Securities.

He expects that households will rebuild deposits in the future. A market drop will likely be the trigger that will eventually cause a transfer of funds back to deposits, he said.

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