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Deposit Runoff
Should bank leaders reassess their liquidity exposure? Two reports raise new questions about that risk.
Moody’s Ratings recently tested 70 commercial banks in eight different risk areas, such as deposit runoff, renewed stress in commercial real estate and aggressive loan growth due to deregulation and reduced capital requirements. The agency rated all but five institutions as having high or moderate risk for deposit runoff — the biggest exposure for the industry overall.
The firm’s analysis was based on historical experience and analytical judgment, says Allen Tischler, senior vice president at Moody’s. Two variables measured liquidity exposure: percentage of uninsured deposits and percentage of brokered deposits. The 23 banks determined to have high exposure for this risk had a concentration exceeding 50% in uninsured deposits or more than 20% in brokered deposits. Forty-two banks had a moderate risk exposure, meaning they had a minimum 30% of uninsured deposits or 10% brokered.
A recent report from the Federal Deposit Insurance Corp. examining three of the largest bank failures in U.S. history, California’s Silicon Valley Bank, First Republic Bank and New York’s Signature Bank, reaffirmed strong links between uninsured deposits and runoff. But the agency pointed to another contributor: a concentration of funds among a small number of large depositors. Top clients at Silicon Valley each held a minimum $49 million in deposits. At Signature and First Republic, top customers had at least $16 million and $6 million, respectively, in March 2023. Those large depositors were more likely to withdraw their funds in the panic.
“When you have questions about bank solvency, that's when the funding starts to go,” says Tischler. “As we saw in 2023, funds can move quickly.” The Moody’s report doesn’t suggest those banks will fail. Bank liquidity profiles look better now, they explained, due to stronger contingency funding plans, improved stress testing and reductions in uninsured deposits.
However, there are new threats to liquidity on the horizon. The FDIC report said depositors associated with the digital asset space were more likely to run in the 2023 failures. Stablecoins have since reemerged as a competitive threat for traditional deposits.
And agentic AI could help customers more quickly move money into higher-yield accounts, wrote McKinsey & Co. analysts in May. That might not result in a run on a bank, but it could harm liquidity and profitability.
• Emily McCormick, vice president of editorial & research for Bank Director
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