Bank stocks sank Friday over fresh fears that another European financial giant may be in trouble, compounding worries of a broader crisis that have led people to move hundreds of billions of dollars out of U.S. bank accounts.
Overall, deposits estimated at $550 billion have moved from smaller and regional banks to large banks and money market funds in the two weeks since Silicon Valley Bank and Signature Bank failed, according to an analysis by JPMorgan Chase.
“Turmoil in the markets always puts money in motion,” said Danielle Lucht, a financial adviser in Cape Coral, Fla., who is fielding twice as many calls from clients as she was a few weeks ago. “The big concern right now is: Is my money safe? How can I make it safer? People who have cash in simple savings accounts are using this as an opportunity to move their money.”
Across the country, millions of Americans are making similar calculations, trying to figure out how to best allocate their money following the implosion of two U.S. banks and the emergency takeover of European banking giant Credit Suisse last weekend, which set off fears of a global financial crisis.
On Friday, all three major stock indexes slipped about 0.3 percent in the first hour of trading, and bank shares in Europe were down sharply after Deutsche Bank said it would buy back some of its debt early in an attempt to bolster its balance sheet. Even though the broader stock market recovered its losses later in the day, shares in major Wall Street banks such as Citibank, JPMorgan Chase, Wells Fargo and Goldman Sachs closed the day lower.
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A broader crisis so far doesn’t seem to have come, and the U.S. government has taken great pains to reassure depositors that bank accounts are safe. But that hasn’t stopped people from shifting their money around. Americans are moving hundreds of billions of dollars out of banks — especially smaller regional banks — into larger institutions, as well as money market funds, government bonds, high-yield online savings accounts, even cryptocurrencies and gold.
In the two weeks since SVB’s dramatic collapse, investments in money market funds, a type of mutual fund focused on low-risk securities, have ballooned by nearly $240 billion, according to the Investment Company Institute. Yields on two-year Treasury bonds have fallen more than 20 percent as a result of booming demand. Money market funds are not insured by the government in the way bank accounts less than $250,000 are. But even riskier investments are thriving: Bitcoin prices have risen 40 percent, and gold is up about 10 percent.
“Contagion comes from panic and fear; it marches from one bank to another,” said Quincy Krosby, chief global strategist at LPL Research. “When things get worrisome, people move their money first — they go into Treasurys, they go into gold — and ask questions later.”
In all, small and medium U.S. banks lost $120 billion in deposits, or 2 percent, in the week of SVB’s collapse, Federal Reserve data shows. (At least some of those deposits went directly to the country’s largest banks, which gained $66 billion in deposits during that period.)
About 12 percent of Americans say they have taken money out from the bank “because of the collapse of Silicon Valley Bank,” and 18 percent say they are considering doing so, according to a Yahoo News/YouGov poll released Tuesday. (It is also worth noting, though, that most people — 55 percent — said they are confident the banking system is safe.)
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Dan Ushman is one of those people who have moved money this month — and he isn’t sure where he’ll end up stashing his company’s funds.
The start-up founder recently moved savings out of Silicon Valley Bank, whose spectacular collapse this month set off tremors across the financial industry, and parked it in accounts at Bank of America and Chase while he contemplates what’s next. The goal, he says, is to maximize interest while reducing exposure to what he thinks looks like growing levels of risk at small banks.
“Having SVB collapse out from under us gave us a lot of pause,” said Ushman, 38, founder of a software firm in Chicago. “We’re thinking hard about how to spread our cash around. We want higher yields and safety.”
The recent shift builds on a trend that began a year ago, when the Fed began raising interest rates after years of keeping them near zero. Suddenly, regular bank accounts — that pay very little, if any, interest — became much less attractive than other investments offering higher returns.
That steady movement out of bank accounts took on a life of its own this month after fears of bank failures led customers at SVB and Signature Bank of New York to take out billions of dollars in cash in a matter of a few hours. The result was a bank run that triggered the collapse of both institutions.
The Fed and other regulators were quick to step in with emergency measures aimed at stemming similar runs at other banks. But panic persists: This week, shares of PacWest Bancorp, a regional California institution, tumbled 17 percent after it said it had lost 20 percent of its deposits this year. Economists say that lack of confidence in a company’s stock can be self-fulfilling if it prompts customers to remove their money, leaving the bank in even worse shape.
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At First Republic Bank, not even a $30 billion rescue package from the nation’s biggest banks has been enough to keep people from taking out their money. In all, customers have withdrawn about $70 billion in recent weeks, or roughly 40 percent of the bank’s deposits, the Wall Street Journal reported this week.
“People are looking around and saying, ‘I really don’t want to be uninsured,’” said Itamar Drechsler, a finance professor at the Wharton School at the University of Pennsylvania. “They’re buying government bonds and going to bigger banks at the expense of regionals.”
The federal government insures deposits of up to $250,000 in any given bank account, though there are looming questions about whether it might raise that cap or extend protection to all deposits as it did at SVB and Signature Bank of New York this month. Treasury Secretary Janet L. Yellen struggled to manage the fallout from remarks Wednesday over the extent to which the federal government could insure deposits over the limit at other banks if they failed; markets fell after she spoke, and she later amended her written testimony to stress that the government has “tools we could use again” and would be “prepared to take additional action if warranted.”
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Still, the recent panic has been enough to spook those with large sums piled into traditional bank accounts. Brenton Wickam, 53, a commercial real estate investor in Silicon Valley, hadn’t thought twice about keeping his personal savings in one bank account — until recently.
When SVB collapsed, Wickam got a barrage of text messages all saying the same thing: “First Republic’s next.” That was particularly troubling to Wickam, who had been banking there for years.
Last week, he showed up at a local branch to begin moving his savings into new accounts, in $250,000 chunks so that they would be insured by the government. The leftover money he took to Wells Fargo, though he plans to invest it in money markets or Treasurys.
“I felt like the dumbest guy in the room, keeping all of my cash in one bank account,” Wickam said. “I’ve been around awhile — 2000, 2008, I’ve seen what a financial crisis looks like — but I was just being lazy.”
The exodus of deposits, particularly from smaller banks, is particularly worrisome because it could have a chilling effect on how much those institutions are able to loan. Nearly 70 percent of commercial real estate loans, for example, come from small and midsize banks, Fed data shows.
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“The consequence of this is manyfold,” said Torsten Slok, chief economist at Apollo Global Management. “The reality is, banks finance themselves through deposits.”
A drop in deposits, he said, would mean banks have less money on hand to make loans. If someone walked in looking for a $40,000 car loan, for example, and a bank didn’t have much in deposits, it would have to borrow that money from wholesale markets, where interest rates have risen rapidly in the past year. As a result, borrowers could face higher interest rates and stricter standards, Slok said.
“If banks across the country suddenly say, ‘We’re going to tighten lending standards for anyone who would like to buy a car or a house or get a corporate loan’ — if they stop lending money out, you could have a sudden stop in the economy,” he said. “That begins to raise the risk of a recession.”
Fed Chair Jerome H. Powell pushed back against that fear this week, saying the banking system is “sound and resilient.”
“We took powerful actions with Treasury and the FDIC, which demonstrate that all depositor savings are safe and that the banking system is safe,” Powell said in a news conference on Wednesday. “Deposit flows in the banking system have stabilized over the last week.”
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Verbal assurances aside, the interventions of regulators have raised more questions than answers for many Americans. They’ve also prompted many people to stop and consider their investment habits, since interest rates are at their highest level in 16 years.
“The silver lining in this debacle is that it’s caused people to pause and ask, ‘Is my money okay at the bank?,’” said Rick Salmeron, a financial adviser in Dallas, who has seen a rush toward high-yield online savings accounts. “They’re realizing, ‘Wow, I have all of this cash making a paltry 0.01 percent interest in the bank when I could be getting 3.5 percent.’”
Steve Miller, 51, a stay-at-home dad in Orange County, Calif., recently moved his family’s savings from a large bank to a Vanguard federal money market account. It wasn’t so much panic over recent bank failures that prompted the move, he said, but rather the realization that he could be earning much higher interest on his money. Now he’s earning 4.65 percent interest.
“We have always kept our cash reserves parked in the bank, but this was a good trigger,” he said. “It made me realize we could be earning much more by being invested in Treasury bills.”
Jeff Stein contributed to this report.