Higher Institutional Expenses Lead to $370B Decline in US Bank Deposits

FDIC, US banks, deposits

Deposits at U.S. banks are down $370 billion in the second quarter for the first time since 2018, and the banking industry also reported a drop in quarterly net income from one year ago.

Deposits fell to $19.563 trillion as of June 30, down from $19.932 trillion in March, according to a Sept. 8 report from the Federal Deposit Insurance Corp. (FDIC).

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“The banking industry reported generally positive results in the second quarter as loan balances strengthened, net interest income grew, and credit quality remained favorable, although net income declined as a result of increased provision expenses,” FDIC Acting Chairman Martin J. Gruenberg said in a press release.

He continued, “Looking forward, downside risks from inflation, rising interest rates, slowing economic growth, and continuing pandemic and geopolitical uncertainties will continue to challenge bank profitability, credit quality, and loan growth.”

The decline in quarterly net income was primarily due to an increase in provision expense at the largest institutions, according to the report.  

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“The increase in provision expense — the amount set aside by institutions to protect against future credit losses — reflects the banking industry’s recognition of risks related to persistent economic uncertainties, and slowing economic growth, as well as the increase in loan balances,” Gruenberg said.

Banks have more deposits than they need after escalating by an estimated $5 trillion over the course of the two-year pandemic. Deposits totaled $19.6 trillion, down 1.9% from the level reported last quarter, but they still well above pre-pandemic levels.  

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As of the second quarter, deposit levels remain elevated at 82.4% of total assets, higher than the pre-pandemic average of 76.7%. 

“A reduction in uninsured deposits was the primary driver of the quarterly decline, although there was also a small reduction in insured deposits,” the report noted. “The banking industry also reported an increase in wholesale funding, primarily Federal Home Loan Bank borrowings, for the second consecutive quarter, as deposit growth declined.”