Crisis Over? Small Banks Stop the Bleeding After Deposit Run

Last month, as news of Silicon Valley Bank’s imminent collapse spread like wildfire, so did the fear that other banks could fall like dominoes, resulting in a run on deposits, especially at smaller banks. In the week ended March 15 – SVB had collapsed on March 10 – deposits at small U.S. banks, i.e. those outside the top 25 in terms of domestic assets, declined by a record-breaking $192 billion, while large banks initially benefited from the panic, gaining $67 billion in deposits that week. Overall, commercial banks in the U.S., including U.S. branches of foreign banks, saw deposits decline by $170 billion in the week ended March 15, as fears of a broader banking crisis were still imminent.

Despite the Fed and the FDIC stepping in quickly and decisively to contain the damage, making customers of failed SVB and Signature Bank whole and promising additional liquidity to other banks struggling to keep up with withdrawal requests, the deposit flight from U.S. banks continued the following week, as Credit Suisse’s collapse further rattled confidence in the banking sector. According to the Fed, U.S. commercial banks lost $172 billion in deposits in the week ended March 22, as large, small and non-U.S. banks saw deposits decline by $90, $40 and $42 billion that week, respectively.

Since then, things have calmed down notably though, and, in the absence of further bank failures, confidence in the financial system is slowly returning. As the following chart shows, small banks have managed to stop the bleeding in recent weeks, with deposits even increasing in two of the past three weeks. There remain some doubts about the banking system’s health, however, as U.S. banks still sit on a large pile of unrealized losses that could come back to haunt them if they ran into liquidity issues in the future.