In an unpredictable financial climate marked by numerous bank failures, large and small U.S. banks have managed to successfully navigate the storm. Surprisingly, it is the mid-sized banks that are struggling the most in the current environment.
Major banks like JPMorgan, Wells Fargo, and Bank of America are anticipated to report a year-on-year decrease in deposits when they announce their recent results.
Analysts predict a combined loss of approximately $500 billion in customer funds. Despite the challenges presented by shrinking deposits, some movement was expected, given the substantial savings that bank customers still hold from pandemic-era government stimulus and reduced spending.
Adapting to rising deposit costs in the U.S.
The larger concern for banks is the increasing cost of the remaining deposits. With 10-year Treasury bonds consistently yielding over 3% since last fall, depositors may choose to switch to investment funds or higher-rate accounts within their bank.
Both scenarios increase funding costs for banks and exert pressure on their net interest margin. However, the largest U.S. banks possess certain advantages that help them weather these challenges.
Customers may prioritize the security of knowing their bank is too big to fail over potential interest gains, particularly in light of the recent collapses of SVB Financial and Signature Bank.
Additionally, big banks in the U.S. can offer non-cash perks, such as JPMorgan’s investments in its tech offerings and Bank of America’s AI-powered financial assistant, Erica.
At the other end of the spectrum, small banks have also managed to fare well in the current climate. Deposits tend to be more stable at smaller lenders compared to their mid-sized regional rivals.
How are small banks better?
By offering a more personal touch and maintaining a strong community presence, small banks can cultivate trust and loyalty with their customers. Furthermore, they often have a geographical advantage, with fewer competitors and customers who may be less tech-savvy.
In 2022, community banks with assets between $300 million and $3 billion reported a 14% return on equity, outperforming lenders with over $10 billion in assets.
Small banks also tend to be more insulated from the effects of deposit price wars and are less exposed to stringent regulations that may arise from the collapse of SVB.
The most uncertainty lies with mid-sized banks, such as M&T Bank, KeyBank, Citizens Bank, and Western Alliance. These institutions are too small to be considered failure-proof but too large to enjoy the benefits and customer loyalty that community banks can command.
Many are likely to face increased scrutiny over liquidity management and higher fees to fund future Federal Deposit Insurance Corp (FDIC) depositor bailouts.
As the largest and smallest U.S. banks continue to thrive, mid-sized banks face a more challenging existence in a turbulent financial landscape.
This dichotomy highlights the importance of adaptability and strong customer relationships in navigating the complex world of banking.
