The Big Idea

Reallocation of deposits could reshape bank credit

| March 17, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Smaller US banks have driven loan growth over the past couple of years in consumer and in residential and commercial mortgage loans with larger banks leading only in commercial and industrial. These same smaller banks have occasionally felt the pinch of deposit run-off, with small bank borrowing at the discount window rising through the fall and peaking in late November at $9.5 billion.  If deposits get reallocated between smaller and larger banks in the wake of SVB, the availability of credit to different sectors could change.  The Fed will need to consider the deflationary impact of a shift in funding as well as liquidity concerns.

A few important snapshots of differences between smaller and larger US commercial banks:

Exhibit 1: Cumulative overall loan growth since January 2021: Smaller banks 19%, larger banks 12%

Source: Federal Reserve H.8 as of 3/1/23 Tables 6 & 8, –  Line 9 Federal Reserve H.8, SCIB US

Exhibit 2: Cumulative consumer loan growth since January 2021: Smaller banks 29%, larger banks 16%

Source: Federal Reserve H.8 as of 3/1/23 Tables 6 & 8 – Line 20, Santander US Capital Markets

Exhibit 3: Cumulative commercial real estate loan growth since January 2021: Smaller banks 28%, larger banks 4%

Source: Federal Reserve H.8 as of 3/1/23 Tables 6 & 8 – Line 15, Santander US Capital Markets

Exhibit 4: Cumulative residential real estate loan growth since January 2021: Smaller banks 25%, larger banks 3%

Source: Federal Reserve H.8 as of 3/1/23 Tables 6 & 8 – Line 12, Santander US Capital Markets

Exhibit 5: Cumulative commercial and industrial loan growth since January 2021: Smaller banks -5%, larger banks 13%

Source: Federal Reserve H.8 as of 3/1/23 Tables 6 & 8 – Line 10, Santander US Capital Markets

Although it is too early to tell, reallocation of deposits from smaller to larger banks or from smaller banks to money market funds or other destinations could particularly affect the cost and flow of credit to consumers and to residential and commercial mortgage markets. If smaller banks substitute wholesale funding for retail, the cost of credit should rise, and smaller banks could be at competitive disadvantage to larger banks with a lower cost of funds. Even if larger banks choose not to compete in smaller markets, the higher cost of credit from smaller banks could slow business activity in those markets.

The Fed’s H.8 report shows trends in lending and funding with a 1-week lag, so the March 24 report should begin to show whether there is any difference in deposit flows between smaller and larger banks. That should have important implications for banks and broader credit.

Tom O'Hara, CFA
thomas.ohara@santander.us
1 (646) 776-7955

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