The drop in US bank deposits in the first quarter was the largest in 39 years

US banks lost $472 billion in deposits in the first quarter, according to a new quarterly report from the Federal Deposit Insurance Corporation (FDIC) that offers a comprehensive look at how the sector weathered its toughest time since the crisis. financial year of 2008.

The decline in filings was the largest since the FDIC began collecting quarterly industry data in 1984 and marked the fourth consecutive quarter of outflows from the industry. The regulator monitors the performance of 4,672 commercial banks and savings institutions.

The decline in deposits, which was 2.5%, was largely due to the movement of uninsured depositors who exceeded the $250,000 per account level supported by the FDIC. They withdrew $663 billion, while insured deposits actually increased by $255 billion.

FILE - People stand outside a branch of Silicon Valley Bank in Santa Clara, California March 10, 2023. California's banking regulator has been too slow to see the growing risks at Silicon Valley Bank and hasn't acted with enough force to get the bank to fix its problems, the regulator found in its own report published on Monday, May 8.  (AP Photo/Jeff Chiu, File)

Silicon Valley Bank was one of three banks that failed in the first quarter. (AP Photo/Jeff Chiu, File)

The FDIC report covers a tumultuous period marked by an aggressive rise in interest rates and the bankruptcies of three banks within days, including Silicon Valley Bank and Signature Bank on March 10 and 12.

First Republic then fell in the second quarter on May 1 in what was the second-largest bank failure in US history.

“The most lasting effects of the industry’s response to this stress may not become fully apparent until we receive second-quarter results,” FDIC Chairman Martin Gruenberg said during a briefing. a press briefing with journalists.

Shares of several regional banks that came under scrutiny during the first quarter turmoil fell again on Wednesday, including PacWest (PACW), Western Alliance (WAL), Zions (ZION) and Comerica (CMA) .

The list of problems

The new report shows that other lenders beyond Silicon Valley Bank experienced extreme stress in the first quarter. The number of banks on the FDIC’s “problem list” increased from four to 43, and assets held by banks on that list rose to $58 billion.

Banks on the FDIC’s problem list typically have multiple weaknesses identified by regulators in confidential prudential ratings and can be seized and closed unless the problems are resolved quickly. This list swelled by the hundreds during the last major industry meltdown that began in 2008.

What was also clear in the new FDIC report was that a basic measure of profitability declined in the first quarter as interest rates rose and depositors began to shift their money elsewhere.

The outflows have forced many banks to start paying more to keep depositors and these higher costs have squeezed the industry’s net interest margins, which measure the difference between what banks earn on their loans and the payment. of their deposits.

The FDIC said those margins fell 7 basis points from the prior quarter to 3.31% as the cost of deposits for banks rose faster than the yield on their loans.

Yields on loans rose 32 basis points in the quarter to 6.08%, while deposits rose 43 basis points to 1.42%.

“Downside Risks”

Overall earnings rose 17% for all FDIC-insured institutions in the first quarter, but that net income would have been flat after excluding accounting gains recorded by institutions that acquired two failed banks.

The industry also ended the quarter with a sizable amount of unrealized losses on securities held by banks. But that amount, $515 billion, was down 16.5% from the previous quarter. These paper losses do not count against most banks’ profits unless the assets are sold.

Gruenberg said the industry remains under pressure on several fronts. “The banking sector continues to face significant downside risks from the effects of inflation, rising market interest rates, slowing economic growth and geopolitical uncertainty,” he said. -he declares.

“Credit quality and profitability may weaken due to these risks and lead to further tightening of loan underwriting, slower loan growth, higher provisioning charges and liquidity constraints,” he said. he added, citing the specific challenges of commercial real estate loans backed by office buildings.

“These will be matters of continued surveillance attention by the FDIC.”

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