More than $114 billion walked out of the biggest United States banks this month, and nobody’s quite sure why.
The Federal Reserve releases data on the assets and liabilities of commercial banks every Friday. The most current figures, covering the first full week of 2013, show the largest one-week withdrawals since the Sept. 11 attacks. Even when seasonally adjusted, the level drops to $52.8 billion—still the third-highest amount on record, and one for which bank experts and analysts were reluctant to give a definitive explanation.
The most obvious culprit is the expiration of the Transaction Account Guarantee program, the extraordinary federal effort to shore up the country’s non-gigantic banks during the 2008 financial crisis. Big banks were considered “too big to fail,” while smaller ones were vulnerable to runs. So the TAG program backstopped their deposit bases by temporarily offering unlimited insurance on money kept in noninterest-bearing accounts. That guarantee ended Dec. 31, so a decrease in deposits would be expected first thing in January.
But hold on: the Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks, as the big ones are still considered too big to fail. “I think [customers] are going to go back to the mega banks,” the head of a regional bank in Bethesda, Md., told The Washington Post in December. “They’ve been assured by the government that mega banks are too big to fail. It’s a horrible, bad, poorly-thought out situation.” Small banks fearfully lobbied the Senate to extend TAG, with analysts telling the New York Times they expected $200 to $300 million—yes, with an m—to move from affected accounts into money market funds or elsewhere.
So if the missing $114 billion is not the result of the TAG program—or at least not all TAG—what’s going on? Paul Miller, a bank analyst with FBR Capital Markets, cautions against reading too much into the Fed’s weekly data. “It’s a noisy database,” he says. Among large U.S. banks, there have been movements of greater than $50 billion (not seasonally adjusted) during 107 different weeks since 2000. It’s not uncommon to see 11-figure swings — that is, tens of billions of dollars — from positive to negative, or vice versa, one week to the next.
Noise can increase near the start of the year. “The first quarter is always a wacky quarter,” Miller says. And January 2013 has seen an incredible amount of change. First: fiscal cliff drama had companies shifting dividends and bank clients guessing what their tax liabilities would be—that might explain the $60.4 billion pumped into the largest banks during the week ending Dec. 26. (Seasonally adjusted, it was the sixth-highest level on record.) Second: the payroll tax just went up, sticking all wage earners with paychecks that are 2 percent smaller.
Third: ordinary investors may be ready to move out of federally guaranteed accounts and into investments. Stocks did great in 2012. As Bloomberg Businessweek’s Roben Farzad wrote on Jan. 16, equity mutual funds saw their second-highest inflows on record in the first week of the year. Economists worry that market exuberance is getting too high, with one measure of risk aversion at a three-decade low.
“If deposits are really trending down—and at the end of the month, we’ll be smarter than we are now—if that’s the case, it can tell us a few things,” says Dan Geller, the executive vice president of Market Rates Insight. “And one thing that it could tell us is that the law of elasticity is finally catching up with deposits.” In other words, contrary to what economic theory predicts, deposits have been piling up at banks ever since the crisis even though they offer pitiful yields. Geller says that may finally be ending—though like Miller, he says not to put too much stock in just one burst of Fed data.
“One week is just a very thin slice,” he says. Still, $114 billion is a big figure, and one to keep an eye on to understand where the economy is headed in 2013.