For the first time since the Second World War, North American banks are preparing for a decline in customer deposits. This new trend, following 2 years of strong growth, is linked to rising interest rates and rising inflation.
Bank deposits: a trend reversal after 2 years of increase
The health crisis has prompted Americans to save more to be able to cope with the unexpected. Over the past two years, bank deposits have increased by 35%; this rise was 10.5% year-on-year in Q4 2021.
Less than 2 months ago, at the end of February, analysts were forecasting a further 3% increase in bank deposits in 2022. These forecasts concern the country's 24 largest banks, which in 2021 accounted for no less than 60% of all deposits in the USA, which last year totalled $19,000 billion.
However, the tide has turned and, for the first time since the Second World War, analysts are forecasting a slowdown and, for some, even a decline in deposits of around 6% over the year.
Rising interest rates, inflation and falling deposits
However, while this trend reversal is a first since the Second World War, it should not have too alarming repercussions for US banks. Indeed, in previous years, the latter had been in greater difficulty due to massive deposits, pushing them to the limits allowed by regulators.
According to a study by Barclays, North American banks have, on average, $8,500 billion more in deposits than they have in loans. Even if an increase in loan demand is to be expected this year, the drop in deposits will not prompt banks to increase remuneration, as such a high level of deposits is not useful for the institutions.
However, it is likely that the US Federal Reserve's interest rate hike will accelerate the decline in deposits. Typically, individuals and companies gradually reduce their bank deposits when interest rates rise, gradually turning to short-term investments and equity markets.
But the Fed has scheduled around 7 rate hikes between now and the end of 2022 in an attempt to curb inflation. By the end of the year, rates could reach 1.875%, a substantial increase that is likely to prompt individuals and businesses to reduce their deposits more quickly.
What's more, the big US banks are facing competition from fintechs and online banks, which can more easily offer attractive deals to entice customers to deposit their savings with them. The war in Ukraine is also having an impact on the economy, as demonstrated by the declining quarterly results of major banks such as Citi, JP Morgan, Wells Fargo and Bank of America.