Deposits and the March 2023 Banking Crisis–A Retrospective

What it says

Two New York Fed researchers look back a year after the March 2023 runs to see whether depositors changed behaviour across the system. The setting: banks entered 2022 with record deposits and near-zero policy rates, then rapid tightening left large unrealised losses on fixed-rate securities and mortgages. Such losses usually stay unrealised because long, stable deposits fund the assets, but several banks faced flight once solvency was questioned. The fear was that pricing pressure would spread. It largely did not. Deposit betas kept rising at a steady pace with no jump after March, and industry funding shifted gradually from noninterest-bearing deposits towards interest-bearing deposits and other debt such as Home Loan Bank advances. The strain sat with super-regional banks, which paid more for deposits and grew funding relative to the industry. The authors credit government guarantees and the Bank Term Funding Facility in part.

What to take from it

1. 1

   Cumulative deposit betas, the change in deposit rates relative to the change in the federal funds rate, continued to rise after March 2023 but did not accelerate.

2. 2

   Industry assets rose about 30 percent from 2019:Q2 to 2021:Q4, funded mainly by deposits, then stayed roughly flat as rates rose.

3. 3

   Distress concentrated in super-regionals, holding companies with $50 billion to $250 billion of assets, whose outflows went mainly to banks above $250 billion.

4. 4

   The largest banks' betas rose more slowly than other banks', consistent with depositors seeing them as safer.

5. 5

   Super-regionals' higher betas pre-date March 2023, so the run did not create that gap; they also kept growing interest-bearing deposits.

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