According to data released by the Federal Reserve on Friday, deposits at small banks in the United States experienced a significant decline of $119 billion to $5.46 trillion in the week ending March 15. This represents the largest drop as a percentage of overall deposits since March 2007 and more than twice the previous record drop.
The drop in deposits can be attributed to the collapse of Silicon Valley Bank (SVB) on March 10, which led depositors to withdraw tens of billions of dollars from the bank in a matter of hours. The impact was felt most strongly at small banks, which experienced a record drop in deposits.
To anticipate further withdrawals, small banks increased their borrowings by $253 billion to a record $669.6 billion, resulting in an increase in cash reserves of $97 billion at the end of the week. In contrast, large US banks experienced an increase in deposits of $67 billion in the same week, reaching a total amount of $10.74 trillion.
It is worth noting that this decline in overall US bank deposits follows a sharp increase due to pandemic aid in 2020 and early 2021. However, the reversal in trend for large banks is noteworthy as the rise in deposits is only half as much as the deposit decline at small banks. This suggests that some of the cash may have gone into money market funds or other investment instruments.
Federal Reserve Chair Jerome Powell has stated that “deposit flows in the banking system have stabilized over the last week”. It remains to be seen whether the collapse of SVB will have a lasting impact on the US banking system or serve as a warning to depositors and banks alike to ensure they are properly prepared for any potential crises in the future.
