Mid-Size and Regional Banks Utilize Reciprocal Deposits for Deposit Growth and Retention

October 31, 2023 | ModernFi Insights

A few weeks ago, we highlighted the rapid increase in reciprocal deposits as banks across the country utilize the product to counter the aggressive deposit runoff that many have faced this year. Following that post, we received some questions around which banks are using the product most heavily. We dig in here.

As a reminder, reciprocal deposits allow banks to attract and retain large-value depositors. Through reciprocal networks, banks can provide customers with extended deposit insurance by sweeping deposits into a network of banks. The customer only needs to maintain one account and one banking relationship with their home institution.

A priori, one would expect small and mid-size banks to utilize the product most heavily, with the largest GSIBs, which are often considered too-big-to-fail, not using the product. Digging in to the data, that assumption is almost correct, but we find an interesting pattern.

Looking at the increase in reciprocal deposits by bank size over the past year, we find that mid-size and regional banks, those with 1 – 100 billion in total deposits, increased their usage of reciprocal deposits the most. The result makes sense; mid-size and regional banks have been some of the most impacted by the rising interest rate environment and the bank turmoil earlier this year that shook depositor confidence.

The pattern of reciprocal deposit usage is telling. Small banks have increased their use of reciprocal deposits to attract and retain depositors, and the product has become fundamental to many mid-size and regional banks. The largest banks have not needed to utilize the product to attract new inflows.

Simply put, reciprocal deposits help level the playing field for small and mid-size banks, allowing them to compete for depositors that would otherwise go to the largest banking institutions or leave the banking sector entirely. The data clearly backs up this argument.

Best,

The ModernFi Team

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Current rates

Change from two weeks ago

Sources: FHLB Advances are an average of FHLB Boston, FHLB Chicago, and FHLB Des Moines. Brokered CDs are an average of Fidelity and Vanguard. Listed CDs provided by National CD Rateline. US Treasurys provided by WSJ. SOFR provided by Chatham Financial.

Deposit data aggregated by ModernFi from FFIEC Call Reports as of 6/30/23.

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