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Protests, scandals create significant deposit headwinds, study shows

StreetTalk – Episode 70: Banks' Liquidity Conundrum Could Fuel M&A Activity

Street Talk Episode 70 - Banks' Liquidity Conundrum Could Fuel M&A Activity

StreetTalk – Episode 69: Banks left with pockets full of cash and few places to go

Street Talk – Episode 69: Banks left with pockets full of cash and few places to go

Protests, scandals create significant deposit headwinds, study shows

Deposits can be more political than they seem.

Customers who close their accounts to protest a bank's actions can create significant headwinds and serve as a check on that institution's behavior, according to a paper presented at Community Banking in the 21st Century research and policy conference.

Banks that funded the Dakota Access Pipeline project saw "significant decreases" in their deposit growth, according to research from Mikael Homanen, a Ph.D. candidate in finance at the Cass Business School at the City, University of London. His paper identifies broader implications for banks that find themselves in the crosshairs of political activism or scandal and helps quantify the cost of reputational damage.

The Dakota Access Pipeline spans North and South Dakota, Iowa and Illinois and sparked protests in late 2016 and early 2017 from environmental activists and from Native American tribes, who said the pipeline would destroy culturally significant land near reservations. In addition to protesting the pipeline, activists also targeted the banks that financed the project. These actions included petitions where individuals urged the banks to drop the project and threatened to close their accounts. Later, municipalities and wealth and pension funds joined the movement to pressure these institutions to divest the project.

"This, for me, is when the social movement became a national phenomenon," Homanen said during his presentation. "You don't really need to really travel to the protest, you can protest at home from your couch by going online and moving your account."

Homanen looked at deposit growth at several of the banks that financed the project with large branch presences in the U.S., including Mitsubishi UFJ Financial Group Inc., Banco Bilbao Vizcaya Argentaria SA, BNP Paribas SA, Citigroup Inc., SunTrust Banks Inc., Toronto-Dominion Bank, Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Wells Fargo & Co.

Homanen found that in 2017, these banks recorded "significantly lower" deposit growth rates, especially at branches that were located close to the pipeline or in counties that rated as environmentally and socially conscious. Participating in the project decreased deposits growth at those banks by 1.5% and 2.2%, compared to the average deposit growth of 8.6% in the full sample of banks. He estimated that these banks lost at least $8.25 billion to $11 billion in total deposits, which he called "the most conservative estimate" in the paper. He also found that local savings banks were among the beneficiaries of the deposit movement.

He found, more broadly, becoming involved in a scandal decreases a bank's deposit growth by 1.5% to 2.1% the following quarter on average. In the case of the Dakota Access Pipeline project, Homanen noted that several banks re-evaluated their commitments to the project and many sold their stakes in the project.