Despite warnings that the end of quantitative easing could trigger an exodus of deposits from the banking system, bankers at smaller institutions argue that customer-driven relationships should insulate the effect of the Federal Reserve's balance sheet normalization process.
In May, JPMorgan Chase & Co. warned that the great unwind, which kicked off this month, could cause $500 billion to $1 trillion in outflows, as an expected increase in long-term rates makes securities more attractive than holding cash and deposits. The Fed plans on rolling off up to $4 billion in mortgage-backed securities and up to $6 billion in Treasuries each month, a rate which will gradually increase every three months until it reaches a monthly $20 billion in MBS and $30 billion in Treasuries.
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But bankers at S&P Global Market Intelligence's Big Decisions in Banking Conference said they do not expect deposits to leave the banking system. At Phoenix-based Western Alliance Bancorp., CFO Dale Gibbons said his company is not worried about losing deposits because of a strong funding mix and deep relationships with their customers. Gibbons said the company's deposits are too sticky to be affected by the Fed's unwind, adding that competitive rates will keep demand deposit accounts parked at Western Alliance. For commercial clients, the company requires borrowers to also maintain deposit accounts.
"I am a little skeptical that it is going to be that severe," Gibbons said regarding warnings of a large reduction in deposits.
Gibbons and other bankers still acknowledged that a drawdown in deposits is still possible. Josh Siegel, managing partner and CEO of StoneCastle Partners, postulated that a lot of the outflow will occur at the large, multinational banks. Siegel said the largest banks have dedicated Treasury groups that are likely to trade in cash and deposits for securities holdings as the Fed releases MBS and Treasuries back into the market. Siegel said smaller banks may only see a "nominal" effect since they don't have these types of trading desks.
For the time being, banks may be paying more attention to the rate environment, as the Fed eyes a third rate hike for 2017. Gibbons said he hasn't seen any large institution moving rates, although Bank of America Corp. and JPMorgan recently reported some pressures to elevate rates on money-market accounts. He said Western Alliance hasn't raised its deposit rates but said he's seen NOW accounts and certain certificates of deposit creeping up despite still being below the standard rates. Siegel similarly noted that banks are closely watching their deposit pricing with each incremental Fed rate hike, and are testing price elasticity on their products as the environment changes.
"I don't know if they're approaching it with a science as much as a feel," Siegel said.
Because of the heavy hand of monetary policy on the industry, Sally Pope Davis at Goldman Sachs Asset Management says deposits should be a key metric for investors like herself. Describing the funding side of the balance sheet as the "true value" of a franchise, Davis said she prefers smaller companies with healthy levels of demand deposit accounts relative to their total deposit bases. She said chasing asset sensitivity can sometime overlook the fact that efficiently-managed deposits can lead to a lower cost of funds and, consequently, a higher margin.
Heading into the unprecedented effort by the Fed to return to normal, Davis said banks should be thinking about protecting their funding.
"None of us have been in this movie before," Davis said.