On the Speed and Sensitivity of Declining Deposits
October 4, 2022 | Wholesale Funding Update
As we discussed last time around, deposit levels fell significantly during Q2. The decline was driven by core deposits, which tend to run off as interest rates rise and depositors chase higher rate alternatives. The speed of the runoff, and the deposits’ sensitivity to rates, is striking.
Core deposits decreased by $397B in Q2, corresponding to a 2.3% decline. The quarter represents the largest decrease in core deposits, both in terms of amount and percent change, since the FFIEC started releasing data in 1992. The second largest quarterly decrease by amount was a $64B decline in Q2 2013 during the “taper tantrum” and by percent change was a 1.6% decline in Q1 1999.
Importantly, core deposits displayed higher-than-average sensitivity to interest rates in Q2. The fed funds rate increased 1.25% over the quarter. Over the past 30 years, a 1.25% increase in rates has corresponded to a 0.54% decrease in core deposits on average. The 2.3% fall seen last quarter is dramatically larger.
Several factors are likely contributing to the speed and sensitivity of the recent deposit decline. Factors include an excess of deposits during the pandemic, quantitative tightening, increased use of non-maturity deposits, and changing technology. Future quarters should provide more insight into the rapidly changing deposit environment.