Last year’s bank failures brought increased attention to large, uninsured deposits and banks’ reliance on them as a source of funding. Taking a data-driven approach, I looked at the recent trend in uninsured deposits, the types of banks with the highest (and lowest) concentrations of uninsured accounts, and whether and to what extent deposit concentrations correlate with interest expense.
FDIC insurance covers up to $250,000 per account at any one bank. If a bank fails, amounts above that limit are (in principle) not guaranteed. When IndyMac Bank failed in 2008, uninsured depositors initially received only 50 cents on the dollar. More typically, another institution acquires the failed bank (often with FDIC assistance) and assumes its liabilities, including the uninsured deposits. Most deposits at SVB and Signature were uninsured, but the FDIC still covered the uninsured under the Systemic Risk Exception. Uninsured deposits offered the worst of both worlds for regulators. They made banks more vulnerable to runs and the FDIC still wound up insuring the uninsured.
Uninsured Deposit Trends
Trends in uninsured deposits can reflect external, supply, and demand factors. Given recent history, regulators might discourage uninsured deposits and reflect high concentrations of uninsured deposits in their risk assessments. Banks themselves might share these concerns and adjust deposit pricing and take other actions to reduce their exposure to large deposits. Incentives for the depositors themselves are more complicated. Last year’s experience may make them more cognizant of bank failures and insurance limits. At the same time, the decision by regulators to effectively insure all deposits at the failed banks may make depositors less likely to take insurance limits seriously.
I used Call Report data to analyze trends in uninsured deposits for 34 large banks with total deposits over $65 billion. The analysis used bank-level rather than holding company data. The FR Y-9C report for holding companies provides much less granular deposit data than does the Call Report. Some banks have multiple charters, and the analysis uses data from the lead bank.
Larger banks overall have become less reliant on uninsured deposits but not a lot less reliant. Levels and concentrations of uninsured deposits have been relatively stable over the past year. As shown in the table below, uninsured deposits fell slightly, from $5.4 trillion to $5.3 trillion. In aggregate, they represent 40% of domestic deposits, down from 41% in March 2023. Looking at the banks individually, the average concentration fell from 43% to 40% and the median fell from 43% to 39%.
Online Banks and Uninsured Deposits
Uninsured deposit concentrations range from 6% to nearly 100% of total domestic deposits. As shown in the table below, online banks tend to rely much less on uninsured deposits than do other large banks. This aversion to uninsured deposits makes sense from a risk management perspective. Online banks compete primarily on rates and offer little in the way of other services and customer relationships that can tether depositors to their primary bank. Capital One is a hybrid in this regard since it also has a significant brick and mortar presence with 259 branches. The other five banks have a combined total of two branches. Goldman’s commercial bank is a relatively small segment of the overall firm, with deposits making up less than 30% of total liabilities.
The modest level of uninsured deposits at these banks may also be a matter of picking your poison. Keeping most deposits within the insurance limits mitigates some of the liquidity risk with limited-service deposits. These deposits not only pay higher rates overall, but they are more rate sensitive than those at the typical bank. On average, online banks pay 125 basis points more on their deposits compared to the broader large bank group. Moreover, this rate has increased by 353 basis points since December 2021, compared to 284 basis points for large banks overall.
Beta measures deposit’s rate sensitivity, which compares the change in a bank’s deposit rates to a market interest rate, such as fed funds. Most banks measure beta for individual deposit types or for non-maturity deposits overall. I used interest expense on all deposits to reflect migration from low-rate deposits to higher rate accounts like CDs. Even this measure may understate rate sensitivity since banks may also replace some deposits with higher cost borrowings to maintain target growth rates. The beta calculation used the change in the target fed funds rate from 2021 as the denominator. Online banks have an average beta of 67.3%, compared to a large bank average of 54.15%.
The rate-sensitive deposits do not mean that online banks necessarily have high overall levels of interest rate risk. High-rate deposits primarily fund credit card portfolios at Discover, Synchrony, and AmEx. Even with the high deposit costs, net interest income at these three banks represents 9.62%, 11.96%, and 7.63% of average assets, respectively. The median for all banks over $100 billion in assets is 2.57%. Margin compression is more of an issue at Goldman Sachs, where net interest income is only 1.52% of average assets. The poor performance may explain Goldman’s pullback from consumer banking.
Uninsured Deposits and Rate Sensitivity
Are uninsured deposits especially rate-sensitive? They appear to be – up to a point. The table below shows seven banks where uninsured deposits represent 50% or more of total domestic deposits. Banks where uninsured deposits represent 70% or more of total deposits have effective betas ranging from 66% to 71%, roughly comparable to those of online banks. However, banks with uninsured deposits in the 50% range are no more rate-sensitive than large banks overall.
The difference reflects variation in each bank’s strategy and the composition of its depositors. BNY Mellon, State Street, and Northern Trust are custodial banks that focus on large institutional clients. This institutional focus is one reason why BNY Mellon and State Street are considered global systemically important banks, while the much larger U.S. Bank is not. Citibank has a large transaction services business that caters to institutional clients. HSBC USA has largely exited retail banking leaving its remaining focus on “international wealth centers.”
The table above shows the average size of all deposits and the average size of deposits above $250,000. Although nearly half of JPMC’s and U.S. Bank’s deposits are uninsured, their deposit profile is considerably different from the other five banks. Those two banks have a large retail base and even their uninsured deposits tend to be smaller. The banks with 70% or more insured deposits have an average uninsured account ten to forty times the FDIC limit. Corporate treasurers and CFOs of these large institutional depositors would be expected to optimize performance. The rate the bank pays may have been less of a concern when market rates were near zero. As rates rose, the opportunity cost of sitting on this money became too great and banks needed to pay up to retain these deposits.
Data Notes: The Call Report includes a line item, “Estimated amount of uninsured deposits in domestic offices.” BNY Mellon reported $213.5 billion for this line item but only $212.25 billion for domestic deposits overall. This appears to be a reporting error. Using the most conservative approach, which includes foreign deposits in the denominator, results in an uninsured/total deposits percentage of 96%.
The Call Report breaks down number of accounts and aggregate balances for accounts $250K and below and for those above $250K. However, this breakdown applies to all deposits worldwide and not merely to domestic deposits. This means that while average deposit size correlates with the overall concentration of uninsured domestic deposits, the correlation may be less for banks with a significant footprint outside the U.S., such as Citibank where 43% of total deposits are in foreign branches.