banks
Nationalised rail – but don’t mention the banks
It is not often I link to the Morning Star – which is now a journalist’s co-operative rather than a USSR tool! They are spot on about the alleged rail nationalisation from Labour – it completely leaves out the rail leasing companies – operated by banks, usually using ‘tax efficient’ offshore operations… They state: It’s... Read more
Can I Speak to Your Supervisor? The Importance of Bank Supervision
In March of 2023, the U.S. banking industry experienced a period of significant turmoil involving runs on several banks and heightened concerns about contagion. While many factors contributed to these events—including poor risk management, lapses in firm governance, outsized exposures to interest rate risk, and unrecognized vulnerabilities from interconnected depositor bases, the role of bank supervisors came under particular scrutiny. Questions were raised about why supervisors did not intervene more forcefully before problems arose. In response, supervisory agencies, including the Federal Reserve and Federal Deposit Insurance Corporation, commissioned reviews that examined how supervisors’ actions might have contributed to, or mitigated, the failures. The reviews highlighted the important role that bank supervisors can play in fostering a stable banking system. In this post, we draw on our recent paper providing a critical review and summary of the empirical and theoretical literature on bank supervision to highlight what that literature tells us about the impact of supervision on supervised banks, on the banking industry and on the broader economy.
Supervision and Regulation Are Distinct Activities
In the economic literature on banking and in discussions of the banking industry, the terms “supervision” and “regulation” are often used interchangeably, but in fact these are distinct activities. “Regulation” is the process of establishing the rules under which banks operate: who can own banks, permissible and impermissible activities, and minimum capital and liquidity requirements. Regulations are subject to public comment and input before they are adopted, and they are published for all to see. “Supervision” involves oversight and monitoring of banks to ensure that they are operating in a safe and sound manner. A key part of supervision is ensuring that banks are in compliance with regulations, but supervision also involves qualitative assessments of banks’ internal processes, controls, governance and risk management—and taking enforcement actions when weaknesses are discovered. While some enforcement actions are public, much of supervisory activity is confidential and not publicly disclosed.
A large body of economic research has focused on the goals and impacts of regulation, but much less research has been conducted on the objectives and impacts of supervision, perhaps reflecting the limited information available on supervisory outcomes. Still, a growing body of empirical research is assessing the impact of supervision on banks and examining how supervision affects the risk-taking, lending, and profitability of supervised banks. We summarize some key findings from this work below.
Risk-taking and Performance
It is difficult to estimate the relationship between supervision and performance because troubled banks get more supervisory attention. So, any simple analysis would probably conclude that more intensive supervision leads to problems at banks. Papers that try to estimate the impact of supervision therefore either try to compare similar banks or employ creative strategies to identify bank characteristics associated with more supervision, but not more risk. Nearly all papers examining the impact of supervision on risk-taking find that more intensive supervision results in reduced risk-taking by banks.
Delis et al. look directly at public enforcement actions, such as cease and desist orders, and find that they are associated with subsequent reductions in bank risk, suggesting that these specific types of supervisory actions are effective in causing banks to change their practices. Other papers instrument for supervision using discrete events or characteristics that result in more or less supervisory attention for particular banks, such as changes in the asset-size cutoff for certain types of supervisory reviews (see Rezende and Wu and Bissetti), distance from supervisory offices (see Hagendorff, Lim, and Armitage; Kandrac and Schlusche, Leuz and Granja), and whether a bank is among the largest in the office responsible for its supervision (Hirtle, Kovner, and Plosser). This research finds that more intensively supervised banks have less volatile income, experience fewer and less volatile loan losses, are less negatively affected by economic downturns, and/or spend more on internal controls than banks subject to less supervisory attention.
In contrast to concerns that supervision may inhibit growth, this reduced risk does not appear to come at the expense of profitability or growth. Most papers that examine this question find that supervision has a neutral to positive effect on profitability, as reflected in equity returns, risk-adjusted returns, market-to-book ratios, or accounting net income. In a previous Liberty Street Economics blog post, we shared our result that more intensively supervised banks do not have measurably lower asset or loan growth rates than comparable banks subject to less intensive supervision. These findings suggest that supervision reduces the risk of bank failure, with little cost to bank profitability. But are there other impacts to consider in weighing the costs and benefits of supervision?
Lending
While more intensive supervision might not reduce bank profitability, it can have effects on other aspects of banks’ activities. The most critical of these is lending. Supervision results in less risky lending, as noted above, but does it also decrease the amount of credit available to borrowers? The papers looking at this question have found mixed results, with some finding that more intensive supervision results in reduced credit supply, while others find that risk is reduced without significantly reducing lending.
The longest-standing research on the impacts of supervision examines how the stringency of the bank examination process affects banks’ lending. In general, these papers find that increased supervisory stringency is associated with reduced loan origination or slower loan growth, though the estimated economic effects of the impact vary. Other studies have found that while supervisory actions such as guidance on commercial real estate and leveraged lending might reduce these types of loans at banks subject to the tighter supervisory expectations, the targeted banks shift into other forms of lending and at least some of the targeted lending shifts to other banks. Some studies find that lending rebounds over time as banks and borrowers adjust to the new approach.
Does Supervision Strike the Right Balance?
In the period after the failures of several large banks in March 2023, many questions were raised about whether more forceful supervision of those banks could have prevented their failure or limited the contagion that followed. Our review does not directly address this specific event but provides some general results about the costs and benefits of supervision. One important caveat to these findings is that they were estimated at levels of supervision prevailing at the time of the analysis. It is possible (and even likely) that the free lunch suggested in the positive relationship between supervision and risk without significant impact on growth may not hold if supervision were dramatically increased from those levels.
Beverly Hirtle is a financial research advisor in Financial Intermediation Policy Research in the Federal Reserve Bank of New York’s Research and Statistics Group.
Anna Kovner is the director of Financial Stability Policy Research in the Bank’s Research and Statistics Group.
How to cite this post:
Beverly Hirtle and Anna Kovner , “Can I Speak to Your Supervisor? The Importance of Bank Supervision,” Federal Reserve Bank of New York Liberty Street Economics, April 15, 2024, https://libertystreeteconomics.newyorkfed.org/2024/04/can-i-speak-to-you....
How Does Supervision Affect Bank Performance during Downturns?
A Peek behind the Curtain of Bank Supervision
Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
Internal Liquidity’s Value in a Financial Crisis
A classic question for U.S. financial firms is whether to organize themselves as entities that are affiliated with a bank-holding company (BHC). This affiliation brings benefits, such as access to liquidity from other affiliated entities, as well as costs, particularly a larger regulatory burden. This post highlights the results from a recent Staff Report that sheds light on this tradeoff. This work uses confidential data on the population of broker-dealers to study the benefits of being affiliated with a BHC, with a focus on the global financial crisis (GFC). The analysis reveals that affiliation with a BHC makes broker-dealers more resilient to the aggregate liquidity shocks that prevailed during the GFC. This results in these broker-dealers being more willing to hold riskier securities on their balance sheet relative to broker-dealers that are not affiliated with a BHC.
Data and Background
Broker-dealers represent an ideal setting to analyze the value to being affiliated with a BHC for two reasons. First, broker-dealers exist as both standalone firms and as part of BHCs, the necessary variation in organizational form. Second, broker-dealers tend to be highly levered and as such are sensitive to changes in market and funding liquidity. As such, an affiliation with a BHC, and thereby access to the liquidity that a BHC can provide, could be quite important to a broker-dealer, especially during times of stress.
Our analysis uses balance sheet and income statement data from the Financial and Operational Combined Uniform Single (FOCUS) report forms filed by all broker-dealers that are registered with the U.S. Securities and Exchange Commission (SEC). The Financial Industry Regulatory Authority (FINRA) provided access to these confidential reports filed by its member firms, the vast majority of broker-dealers. As such, the full cross section of broker-dealers is considered. The work focuses on the GFC, because it is precisely during such an aggregate liquidity shock that one expects an affiliation with a BHC to matter.
The chart below demonstrates that in terms of total assets, broker-dealers are roughly split across BHC affiliated and non-BHC affiliated from 2004 to 2011. Both types of broker-dealers suffered during the GFC, with a large decline in total assets after the bankruptcy of Lehman Brothers in September 2008.
BHC and Non-BHC Broker-Dealers Lost Assets after the Lehman Bankruptcy
Source: FOCUS reports and author’s calculations.
Analysis
Our analysis of dealers’ balance sheets looks for evidence of broker-dealers shifting toward trading Treasuries to a larger degree over the GFC, given the safety and liquidity of these securities. Furthermore, the analysis considers whether there is a difference in behavior between BHC-affiliated and non-BHC affiliated broker-dealers. Changes in trading strategy around Treasuries will show up on balance sheets as changes in repo and reverse repo activity, as well as long inventory holdings. As a result, we focus on these three balance sheet items.
The table below details how these three balance sheet items, as a share of total assets, varied across the pre-crisis period (2004:Q1 to 2007:Q3) and during the crisis (2007:Q4 to 2011:Q4).
In the Crisis, Non-BHC Broker-Dealers Moved Toward Trading Treasuries Unlike BHC Broker-Dealers
Non-BHC BHCPre-crisisCrisis Pre-crisisCrisisRepo share of total assets40.7%43.4% 45.3%30.0%Reverse repo share of total assets31.9%37.9% 33.2%21.6%Government securities share of long inventory50.2%54.7% 45.6%42.5%Source: FOCUS reports and authors’ calculations.
Notes: BHC is the group of broker-dealers affiliated with a bank-holding company, non-BHC is the group of broker-dealers not affiliated with a bank-holding company. Further, pre-crisis is from the first quarter of 2004 to the third quarter of 2007 and crisis is from the fourth quarter of 2007 to the fourth quarter of 2011.
During the crisis, non-BHC affiliated broker-dealers increased their repo and reverse repo activities as a share of total assets. For these broker-dealers, repo activity’s share of total assets climbed from 40.7 to 43.4 percent. Similarly, reverse repo activity’s share increased from 31.9 to 37.9 percent. In contrast, BHC broker-dealers decreased their repo and reverse repo activity by substantial amounts.
These changes in repo and reverse shares are consistent with the story of non-BHC affiliated broker-dealers reacting to an aggregate liquidity shock with a flight to quality and so increasing their trading of Treasuries. Furthermore, BHC affiliated broker-dealers, given their access to internal capital markets, did not face the same liquidity pressures and decreased their share of trading Treasuries.
This story is further supported by considering government securities’ share of long inventory. Non-BHC affiliated broker-dealers increase this share by 4.5 percentage points, on average, whereas BHC affiliated broker-dealers decreased this share by 3.1 percentage points.
Formal regression analysis reinforces this message and demonstrates that the results outlined above are robust. A main result is that non-BHC affiliated broker-dealers shift toward the use of repos and reverse repos as a share of total assets by more than 10 percentage points relative to BHC affiliated broker-dealers. In addition, there is a dramatic difference in the composition of long inventory, where the estimated coefficients imply that non-BHC affiliated broker-dealers increased the share of Treasuries held in long inventory by 5 percentage points whereas BHC affiliated broker-dealers decreased that share by 10 percentage points.
Takeaway
Our main result provides evidence that broker-dealers that are not associated with BHCs dramatically re-structured their balance sheet during the GFC, pivoting away from illiquid assets and toward more liquid government securities. Dealers associated with BHCs did not need to undergo such extreme changes in part because they had access to internal liquidity. This allowed BHC-affiliated dealers to provide more intermediation services in a range of financial markets that were under stress, likely reducing the extent of the disruptions.
The benefits from having access to internal liquidity are likely informative about the benefits of access to liquidity from the Federal Reserve. In fact, the benefits of access to central bank liquidity are likely to be greater since that liquidity should be more reliable than access to internal liquidity. Among broker-dealers, the Federal Reserve’s Standing Repo Facility (SRF) is only available to primary dealers. The results of this work suggest that there could be benefits to wider access to broker-dealers, especially those not affiliated with BHCs, in line with the recommendation of the Group of Thirty report.
Adam Copeland is a financial research advisor in Money and Payments Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
Cecilia Caglio is the chief of the financial structure section at the Federal Reserve Board.
How to cite this post:
Cecilia Caglio and Adam Copeland, “Internal Liquidity’s Value in a Financial Crisis,” Federal Reserve Bank of New York Liberty Street Economics, April 8, 2024, https://libertystreeteconomics.newyorkfed.org/2024/04/internal-liquidity....
The Value of Internal Sources of Funding Liquidity: U.S. Broker-Dealers and the Financial Crisis
The Fed’s Latest Tool: A Standing Repo Facility
Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
The Neoliberal West is doomed – by its bankers
This is a good thread from Stephanie Kelton of Modern Money fame where she indicates how China understands money and uses it appropriately on the state’s behalf. Drawing on an old Bloomberg article, she says: “[O]ld-fashioned financial thinking [says] that the government should aim to balance its budget, but in reality China is already transitioning... Read more
Learning by Bouncing: Overdraft Experience and Salience
Overdraft credit, when banks and credit unions allow customers to spend more than their checking account holds, has many critics. One fundamental concern is whether overdrafts are salient—whether account holders know how often they overdraw and how much it costs them. To shed light on this question, we asked participants in the New York Fed’s Survey of Consumer Expectations about their experience with and knowledge of their banks’ overdraft programs. The large majority knew how often they overdrew their account and by how much. Their overdraft experience, we find, begets knowledge; of respondents who overdrew their account in the previous year, 84 percent knew the fee they were charged, roughly twice the share for other respondents. However, even experienced overdrafters were relatively unaware of other overdraft terms and practices, such as the maximum overdraft allowed or whether their financial institution processed larger transactions first.
Background
Overdraft credit was transformed with the advent of electronic debiting in the 1990s. Before then, bankers decided case by case whether to cover checks as a courtesy for trusted customers. As debit cards and automated teller machines (ATM) proliferated, banks began adopting automated programs that determine in real time whether to allow an overdraft. These “bounce protection” programs (so called after bounced checks) were marketed by industry consultants to banks and credit unions as a potential benefit to depositors and banks alike. Financial institutions can only cover overdrafts of customers who have opted into their overdraft program (see Dlugosz, Melzer, and Morgan for more on overdraft credit).
Overdraft Surveys
Overdraft credit is not tracked by the major credit bureaus, so most of what we know of it comes from surveys and focus groups. The Consumer Financial Protection Bureau (CFPB) held interviews and focus groups with thirty-six low- and moderate-income households about their experiences with overdraft credit, finding that “(m)any expressed confusion about overdraft coverage during and after account opening.”
Our findings are based on a larger sample of U.S. households that participated in the February 2022 SCE Credit Access Survey, a module of the Survey of Consumer Expectations. The survey covers a nationally representative sample of 1,100 U.S. household heads, of which roughly 1,000 responded. All but 2 percent reported having a checking account at a bank or credit union. In our discussion below, we use “bank” to refer to either banks or credit unions.
Overdraft Experience
We start by summarizing respondents’ experience with overdrafts over the previous year—how often they overdrew, and by how much. Almost four-of-five (78 percent) reported zero overdrafts over the previous year (see the first chart below, including the full survey question). This finding is consistent with other surveys showing that a small fraction of depositors pays the bulk of overdraft fees. Approximately half of all overdrafts reported were for less than $50, barely more than the typical overdraft fee these days (see the second chart below).
Thinking back over the past year (twelve months), about how many times did you overdraw your account?
Percentage of respondents
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Source: SCE Credit Access Survey, February 2022.
By how much did you typically overdraw your account (how negative was your balance on average)?
Percentage of respondents
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Source: SCE Credit Access Survey, February 2022.
Looking across respondents, we find that those who overdrafted more also tended to overdraw in larger amounts; the correlation was 0.36 and significantly different from zero. Overdraft fees are usually invariant to size, so this correlation implies that more frequent overdrafters receive somewhat more credit per fee.
Just 1.5 percent of respondents did not know whether they had overdrawn in the past year, and only 11 percent did not know by how much they had overdrawn. This finding suggests that the event of overdrawing, at the very least, is salient.
Expected or Accidental Overdrafts?
Are overdrafts always a surprise, or do account holders ever anticipate that a purchase will cause a negative balance? We asked respondents who overdrew in the previous year what fraction of the time they expected to do so (see chart below). The majority, 58 percent, said they never expected to overdraw, suggesting most overdrafts are accidental. We did find, however, that the fraction of expected overdrafts was significantly, positively correlated (at the 0.31 level) with overdraft frequency. This finding is in line with a recent CFPB study that found more frequent overdrafters were more likely to expect their most recent overdraft.
What percent of the time did you expect at the time of the transaction that you would be overdrawing your account?
Percentage of respondents
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Source: SCE Credit Access Survey, February 2022.
Overdraft Salience
We asked several questions to assess participants’ knowledge of the overdraft terms at their banks, starting with the most basic—the fee charged. The responses are summarized in the chart below. (We excluded the roughly 10 percent of participants who reported that their bank did not allow overdrafts for a fee.) Fully half of all respondents did not know their bank’s overdraft fee, a potentially worrisome finding (see the left bar in the chart). Notably, the knowledge gap was largely driven by respondents who had not overdrawn in the previous year (see the right bar). Among respondents who experienced an overdraft, 84 percent knew their bank’s overdraft fee. This finding provides some assurance that people prone to overdrafts will know what it will cost should they overdraft again.
What is the fee per overdraft at your financial institution?
Percentage of respondents
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Source: SCE Credit Access Survey, February 2022.
We see a similar, if less stark, pattern with overdraft limits, or the maximum overdraft that a bank allows (see chart below). Just 20 percent of respondents overall knew the limit, as compared to 39 percent of those with overdraft experience.
What is the maximum overdraft your financial institution allows (the overdraft limit)?
Percentage of respondents
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Source: SCE Credit Access Survey, February 2022.
Out-of-Order?
Some banks may clear customers’ largest transactions first, rather than in chronological order. Banks claim that reordering helps to ensure that customers’ rent or mortgage payments clear, but it can also increase the number of overdrafts.
As shown below, just 16 percent of respondents overall knew if their banks reordered transactions, and only 23 percent with overdraft experience knew. It is unclear, however, how prevalent reordering is today after a series of class-action lawsuits successfully challenged the practice.
Does your financial institution reorder transactions by clearing the largest payments first?
Percentage of respondents
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Source: SCE Credit Access Survey, February 2022.
Inattention
Inattention, a concept in behavioral economics, also arises in the context of overdraft credit; even if terms are salient, some depositors may not pay sufficient attention. Our survey gauged inattention by simply asking participants how much they cared about their banks’ overdraft policies. About 41 percent overall said the policies did not matter at all—in other words, the participants were indifferent (see chart below). By contrast, only about 10 percent of those with overdraft experience were indifferent.
How much do your financial institution's overdraft policies matter to you?
Percentage of respondents
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Source: SCE Credit Access Survey, February 2022.
Summing Up
Whether overdraft policies are salient or shrouded is a key question in the debate about overdraft credit; high overdraft fees are particularly problematic if people don’t even realize they are paying them. Our findings suggest that basic aspects of overdraft are salient: people are well aware of how often they overdraw and how much it costs them. In general, we find that people with recent overdraft experience are more attentive to their institutions’ overdraft policies. However, even experienced overdrafters are unlikely to know if their bank or credit union reorders checking account transactions.
Donald P. Morgan is a financial research advisor on Banking Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
Wilbert van der Klaauw is the economic research advisor for Household and Public Policy Research in the Federal Reserve Bank of New York’s Research and Statistics Group.
How to cite this post:
Donald P. Morgan and Wilbert van der Klaauw, "Learning by Bouncing: Overdraft Experience and Salience," Federal Reserve Bank of New York Liberty Street Economics, April 1, 2024, https://libertystreeteconomics.newyorkfed.org/2024/04/learning-by-bounci....
Hold the Check: Overdrafts, Fee Caps, and Financial Inclusion
Who Pays the Price? Overdraft Fee Ceilings and the Unbanked
Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
Deposits and the March 2023 Banking Crisis—A Retrospective
In this post, we evaluate how deposits have evolved over the latter portion of the current monetary policy tightening cycle. We find that while deposit betas have continued to rise, they did not accelerate following the bank runs in March 2023. In addition, while overall deposit funding has remained stable, we find that the banks most affected by the March 2023 events are offering higher deposit rates and are growing their deposit funding relative to the broader banking industry.
Monetary Policy and Banks’ Security Losses
The beginning of 2022 saw unique conditions in the banking sector relative to prior cycles. Deposits and reserves were at their highest levels since the global financial crisis (GFC) of 2007-08, while policy rates were effectively at the zero lower bound. These conditions were in part attributable to the unique nature of the COVID recession and the various forms of government support that sought to minimize disruptions to banks, businesses, and households.
The Federal Reserve embarked on a rapid tightening cycle in March 2022 to counter a significant increase in inflation. By March 2023, interest rate increases had reduced the value of various fixed-rate assets, like securities and mortgages, resulting in substantial unrealized losses in the banking sector. Typically, such losses remain unrealized because banks can hold their fixed-rate assets to maturity since these are funded by relatively fixed, long-maturity liabilities (see this April 2023 post for more on this phenomenon). In this case, however, several banks experienced depositor flight in response to solvency concerns.
Given these disruptions, there was a risk that pervasive unrealized losses might inspire a revision in depositor behavior that would imperil the broader banking system by forcing additional institutions to raise deposit rates or seek expensive funding to avoid selling assets and realizing interest-rate-related losses.
Industry Deposit Conditions Appear Stable
The cost of deposits relative to prevailing interest rates has continued to increase, but the pace of change has appeared stable following the events in March 2023. The chart below depicts the change in overall deposit rates relative to changes in the federal funds rates—or the cumulative beta—over the course of the last five tightening cycles for the banking industry. Since 2023:Q1, the cumulative beta of deposits has continued to rise. While the current tightening cycle now resembles those prior to the GFC, there does not appear to have been a sharp change in the progression of deposit pricing following the events in March.
Industry Deposit Beta Continues to Rise at a Steady Rate
Sources: FR Y-9C data; authors’ calculations.
Notes: Betas are the cumulative change of implied deposit rates on total deposits (interest-bearing and noninterest-bearing) relative to the change in the average quarterly federal funds rate. Implied deposit rates are estimated as the interest expense on deposits divided by the average deposit balance in the quarter.
Nevertheless, the composition of bank funding has continued to evolve. The chart below depicts the evolution of sources of industry funding relative to total assets in 2019:Q2. For this exercise we maintain a balanced panel of banks and exclude the banks that failed in March 2023. This approach allows us to study the relative importance of each category of funding as well as the change in funding over time.
The chart shows that the industry grew substantially during the downturn, with assets up approximately 30 percent through 2021:Q4 relative to 2019:Q2 (the dark blue line). The growth in assets was primarily funded by the growth in interest-bearing (the light blue line) and noninterest-bearing (the red line) deposits. Since 2021:Q4, assets have remained roughly flat: declines in noninterest deposits were offset by a rise in other debt (the gold line) such as advances from Federal Home Loan Banks (FHLB) and interest-bearing deposits (including time deposits). These trends appear unchanged following the events of 2023:Q1.
Industry Asset Growth Has Slowed, but Overall Funding Is Stable
Sources: FR Y-9C data; authors’ calculations.
Notes: Industry quantities are plotted relative to total assets in 2019:Q2, which illustrates dynamics over time as well as their importance relative to the size of the industry. The first vertical line indicates the start of the current tightening cycle; the second indicates the turmoil in the banking sector in March 2023.
Deposit Pricing and Funding across Banks
Since the events in March, bank distress has been concentrated in a subset of banks and not readily observed at the industry level. Here we examine how deposit price and funding conditions changed for banks of different sizes. This is particularly insightful because much of the immediate distress following the events in March 2023 was concentrated among bank holding companies (BHCs) between $50 billion and $250 billion in assets, also known as “super-regionals” (see this May 2023 blog post). These banks experienced large deposit outflows that were mostly directed toward the largest banks (those with assets of at least $250 billion).
The chart below illustrates the evolution of cumulative deposit betas during the current tightening cycle across the distribution of bank size. There are meaningful differences in the cumulative deposit betas, with super-regionals (the gold line) being a key outlier. Deposit betas for these institutions have generally been higher than those of smaller banks throughout this tightening cycle. However, the difference with smaller banks emerged prior to 2023:Q1 and remained consistent through the March episode. Indeed, there do not appear to have been meaningful shifts in the betas of super-regionals relative to those of smaller banks since the bank run.
For the largest banks, betas have been going up at a slower pace than those of other banks. This may reflect the perceived safety of these institutions relative to other banks and is consistent with the flow of deposits to the largest banks around the Silicon Valley Bank episode.
Super-Regionals Exhibit Consistently Higher Deposit Betas
Sources: FR Y-9C data; authors’ calculations.
Notes: Betas are the cumulative change of implied deposit rates on total deposits (interest-bearing and noninterest-bearing) relative to the change in the average quarterly federal funds rate. Implied deposit rates are estimated as the interest expense on deposits divided by the average deposit balance in the quarter. BHCs are placed in size buckets using asset size in 2009:Q4 dollars.
Turning to balances, super-regionals have also experienced differential funding patterns relative to the industry as a whole. The chart below summarizes the relative importance of each funding category along with the evolution since 2019:Q2. For the super-regionals, assets grew in line with the industry up to the quarter in which rates increased. However, after rates began to rise, the super-regionals continued to grow while the industry has remained roughly flat. The growth in super-regional BHCs reflects the continued increase in interest-bearing deposits and, to a lesser degree, other debt. In association with super-regionals’ greater responsiveness to interest rates, these results suggest that these banks have raised their rates by more but have also been able to grow interest-bearing deposits relative to the industry.
Super-Regional Asset and Deposit Growth Exceeds the Industry
Sources: FR Y-9C data; authors’ calculations.
Notes: Industry quantities are plotted relative to total assets in 2019:Q2, which illustrates dynamics over time as well as their importance relative to the size of the industry. The first vertical line indicates the start of the current tightening cycle; the second indicates the turmoil in the banking sector in March 2023.
Summing Up
The events of March 2023 increased the saliency of the sensitivity of deposit funding to macroeconomic and bank-specific conditions. Our review of deposit pricing and funding since that time indicates that the industry appears to have avoided a significant change in depositor behavior that would further pressure earnings and capital. This may in part have been due to government interventions, such as the guarantees extended to depositors and creation of the Bank Term Funding Facility.
Further, we document that the deposit pricing of super-regional banks has exhibited a greater sensitivity to rising rates. In line with higher rates, these banks have also grown deposit funding relative to the broader banking industry. In our next post, we will explore the future path of deposit rates given the current neutral stance of monetary policy.
Stephan Luck is a financial research advisor in Banking Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
Matthew Plosser is a financial research advisor in Banking Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
How to cite this post:
Stephan Luck and Matthew Plosser, “Deposits and the March 2023 Banking Crisis—A Retrospective,” Federal Reserve Bank of New York Liberty Street Economics, March 27, 2024, https://libertystreeteconomics.newyorkfed.org/2024/03/deposits-and-the-m....
How Do Interest Rates (and Depositors) Impact Measures of Bank Value?
Bank Funding during the Current Monetary Policy Tightening Cycle
Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
The National Debt doesn’t add up
Carol Vorderman has been doing some sums: FACTS David Cameron became PM, after Gordon Brown, on May 11th 2010, 5000 days ago. In June 2010 he said the national debt was £770 billion (other sources quote £903 billion, but I’ll use HIS £770 billion for the calculation) By end Nov 2023 the National Debt had... Read more
The National Debt doesn’t add up
Carol Vorderman has been doing some sums: FACTS David Cameron became PM, after Gordon Brown, on May 11th 2010, 5000 days ago. In June 2010 he said the national debt was £770 billion (other sources quote £903 billion, but I’ll use HIS £770 billion for the calculation) By end Nov 2023 the National Debt had... Read more
UNRWA nominated for Nobel Peace Prize – but Israel freezes its bank accounts
Israeli move likely to mean even faster starvation for hundreds of thousands
UNRWA, the United Nations relief agency for Palestine, has been nominated for the Nobel Peace Prize. The news comes as the assault on UNRWA’s funding intensifies.
A number of nations have, inexcusably, used Israel’s claims – that twelve of the agency’s more than 13,000 employees in Gaza took part in the 7 October raid – as a pretext for cutting off funding to UNRWA despite its central role in providing relief for the two million Palestinians in Gaza who are in starvation because of Israel’s blockade.
And Israeli bank Leumi has today locked all of UNRWA’s accounts, claiming UNRWA is unable to provide sufficient receipts to be able to prove no funds are going to ‘terrorists’. The UN has said it has no alternative mechanism to fund UNRWA if international donations are cut off and a number of nations – including Norway, home of the Nobel Peace Prize – have said they will continue to provide funds. But if UNRWA is unable to access them where it needs them, it will be even more severely hampered.
Norwegian Labour MP Asmund Aukrust told Dagbladet that he had nominated UNRWA,
for its long-term work to provide vital support to Palestine and the region in general.
Israel bombed the relief offices last week of Belgium, another country whose government has committed to funding UNRWA.
The nomination is an apt response to Israel’s smears against UNRWA and the collusion of some western nations, including the US and UK, in the genocide in Gaza. But it will not feed the starving – and despite being officially on trial for genocide at the International Court of Justice (ICJ) and ordered by the ICJ to protect Palestinian lives, the Israeli apartheid regime’s murderousness toward the millions of civilian Palestinians in Gaza appears to know no bounds.
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3 months after attacking Tories for scrapping bankers’ bonus cap, Reeves says Labour won’t put it back
‘It tells you everything you need to know’
On 31 October last year, Shadow Chancellor Rachel Reeves – the awful Keir Starmer’s equally awful right-hand woman – derided the Tories for scrapping the cap on bankers’ obscene bonuses in the middle of the cost of living ‘crisis’, which is in reality an engineered emergency fattening corporate profits at the expense of putting millions into hardship and often outright poverty.
Today, three months to the day later, she has announced that Labour will not restore the cap, because she considers the predatory capital machine of the City of London to be a solution to the UK’s problems and not a key driver of them – and has seemingly forgotten how Blair and Brown’s support for wild banking led to the 2008 financial crash. To quote Reeves’s own words back at her, ‘It tells you everything you need to know’.
Three months. On the one hand, it’s a pathetically short time to hold a policy – and on the other it’s a lot longer than Starmer’s hollowed-out corpse of the Labour party has held onto most other positions, except those involving support for apartheid and genocide, privatising and destroying the NHS, sucking up to the US, putting the police and army beyond justice and accountability and promising to do the same as the Tories only faster.
Labour is dead and there is no depth to which the ghouls animating its corpse will not stoop.
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