Two Key Factors Driving Deposit Flight (and Two Solutions)
Regional banks are facing challenges as a number of factors put pressure on deposits. In the past few months, three banks (Silicon Valley Bank, Signature and First Republic Bank) collapsed due to deposit flight or customers pulling deposits and transferring them to the perceived safety of the big four banks—Chase, Bank of America, Citibank, and Wells Fargo.
These failures share two important factors: interest rate risk and loan portfolio losses, which lead to a deposit retention problem as the perceived health of the bank is questioned. To meet this challenge, regional banks must demonstrate stability and unique value to the communities they serve. In this post, we’ll examine these factors and solutions that we’re recommending and using with clients to address the challenge proactively.
Factor 1: Interest Rate Risk
According to testimony from Martin Gruenberg, Chairman of the FDIC, the Federal Reserve’s aggressive rate increases beginning in 2022 exposed Silicon Valley Bank and other regional banks to interest rate risk. In the wake of the pandemic with interest rates near zero, banks looked for more yield through long-dated bonds with returns of 2% or less. Last year, as the Fed began quickly raising rates to the current high of 5-5.25%, those bonds were worth far less. As customers pulled deposits, banks were forced to sell those bonds at a loss.
Factor 2: Loan Portfolio Losses
Regional banks' balance sheets have been further weakened due to increased exposure to commercial real estate. Economists at Goldman Sachs estimate regional banks account for 80% of lending to commercial real estate. The change to hybrid and work-from-home increased the national vacancy rate to 18%, resulting in rising delinquencies.
These two factors together have driven an increase in deposit flight for regional banks. Customers and businesses with accounts above the FDIC's $250,000 insurance limit fear losses if a bank fails. This results in customers taking deposits to larger banks with perceived healthier balance sheets and “too-big-to-fail” government backing.
Among recent regional bank collapses, Silicon Valley Bank had the highest rate of uninsured deposits followed by Signature and First Republic. In each case, the FDIC stepped in and insured all deposits, yet deposit flight continued. Another four regional banks have uninsured rates above 50% with a fifth at 47%. If deposit flight continues, more banks are at risk.
Solution: Digital Communication
Regional banks have the opportunity to respond to these challenges by building stronger relationships with their deposit customers through innovation and improved communication.
A communications plan leveraging digital channels can help emphasize stability and differentiate regional banks from the top four national banks. Digital channels can also enable banks to personalize the customer experience, providing relevant and engaging content that meets their specific needs and preferences. This can foster a sense of loyalty and create a long-term relationship between the bank and its customers.
Moreover, digital channels provide a wealth of data that banks can use to measure the effectiveness of their marketing campaigns and optimize their strategies. By analyzing customer behavior and feedback, banks can identify areas for improvement and refine their approach to ensure maximum impact.
Solution: Value-Add Features
Along with a comprehensive communications plan utilizing digital, regional banks should continue innovating to meet customer demand.
A successful deposit retention strategy must include implementing new value-add solutions for customers. For example, customer behavior has already shifted to instant payment services like Venmo and Cash App. Innovative services like FedNow will allow regional banks to tap into the expanding instant payment market, providing safe and efficient instant payment services while modernizing legacy payment systems and opening up opportunities to personalize experiences. These innovations will help boost customer satisfaction and loyalty.
Additionally, banks should invest in modernizing their digital platforms to provide a seamless customer experience and enhance their competitiveness in the marketplace. New value-add self-service experiences put control into customers hands, improving loyalty while also lowering operational costs.
Don’t Wait to Take the Next Step
Bounteous has partnered with several banks and financial services providers to create and execute a digital communications strategy that increases engagement and drives customer action. We’ve also built and launched digital platform improvements to elevate customer experience and services for financial institutions. Through our “Co-Innovation Studio” sessions, we can work alongside a regional bank to rapidly create the vision and activate strategies to achieve deposit growth.
Losing a regional bank is devastating for a community and its businesses. By developing a clear strategy, continuing to invest in innovation, and creating personalized, targeted messaging to inform and assure customers, regional banks can reduce deposit flight and maintain their relevance.