U.S. Bank Deposits Drop Most Since 9/11 as FDIC Support Ebbs

Clients of the largest U.S. banks withdrew funds this month at the fastest weekly pace since the Sept. 11 attacks as a deposit-insurance program ended and customers tapped into their year-end cash hoards.

Net withdrawals at the 25 largest U.S. lenders totaled $114.1 billion in the week ended Jan. 9, pushing deposits down to $5.37 trillion, according to Federal Reserve data released earlier this month. The magnitude of the drop was second only to the decline after the Sept. 11, 2001, terrorist attacks, according to Jason Goldberg, a New York-based analyst at Barclays Plc.

Customers may be moving money no longer insured by the U.S., drawing down year-end balances and investing in advancing equity markets. A Federal Deposit Insurance Corp. backstop, the Transaction Account Guarantee program, ended last month, prompting some analysts, investors and trade organizations to predict it could drive funds from the banking system. “What you are seeing now is probably TAG money,” Subadra Rajappa, a fixed-income strategist at New York-based Morgan Stanley, said in a telephone interview. “Some of the banks’ corporate customers have said they were going to take the money out” if the program expires as it did, she said.

The transaction-account protections were introduced in the wake of the 2008 credit crisis and had guaranteed about $1.5 trillion in non-interest-bearing accounts above the FDIC’s general limit of $250,000. The program expired Dec. 31.

Deposits closed the year at about $5.4 trillion, the highest month-end total in 2012 and more than $500 billion higher than at the end of 2011, according to Fed data.

Industry groups such as the American Bankers Association and Independent Community Bankers of America had sought an extension for TAG to keep accounts from being moved. “We knew that fund managers would re-evaluate where they want to keep their money — in a non-interest bearing account, another account at the bank or in other investments,” James Chessen, chief economist at the ABA, said in a telephone interview. “If it continues there will be reason to be concerned.”

Total money-market fund assets climbed $70 billion in the two weeks ended Jan. 8 to $2.7 trillion, according to money-fund research firm iMoneyNet in Westborough, Massachusetts. Assets fell to $2.69 trillion in the week ended Jan. 15.

Some of the bank deposit moves may be year-end balance sheet management by corporate customers, according to Chessen and strategists including Alex Roever at JPMorgan Chase and Co. and Bank of America’s Brian Smedley. Rajappa said it’s too early to say for sure what caused the drain of deposits.

The 25 largest banks lost almost $53 billion of deposits once seasonal variations are taken into account, according to the Fed data released Jan. 18. That shows some of the decline is tied to “calendar-related effects,” Roever said.

“You see a run-up in deposits at year-end and then a draw-down after the start of the year,” he said in a telephone interview. The cash isn’t going into investments one would expect if it were coming from FDIC-insured accounts, such as Treasury or government related money-market funds, he said.

Global investors are the most bullish on stocks in at least 31/2 years, with close to two-thirds planning to boost equity holdings within six months, according to a Bloomberg survey.

The outflow follows a year in which total deposits from all sources and regions surged as much as 8 percent at the nation’s five biggest lenders, with the fastest pace set by San Francisco-based Wells Fargo and Co. and Minneapolis-based U.S. Bancorp. Wells Fargo had $945.7 billion in core deposits at year-end. U.S. Bancorp reported $249.2 billion of deposits.

JPMorgan, ranked first by deposits, reported a 6 percent rise for 2012 to $1.19 trillion. Bank of America, ranked second by assets and based in Charlotte, N.C., boosted deposits 7 percent to $1.11 trillion, the same pace as New York-based Citigroup, with $930.6 billion at year-end.

For the largest lenders, the decline in deposits this year may be a welcome trend, Chessen said. An increase coupled with weak loan demand means banks must purchase lower-yielding securities, driving down profit margins, he said. Net interest margins, a measure of profitability represented by the gap between what banks pay depositors and what’s earned on loans, are falling across the industry. The figure at Wells Fargo and JPMorgan fell at least 0.3 percentage point in the fourth quarter from a year earlier.

“The bigger banks have to pay FDIC insurance on these deposits plus some of their capital and leverage ratios are adversely impacted,” Rajappa said. “Many of the banks don’t want these.”