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Report
The impact of network size on bank branch performance
Despite recent innovations that might have reduced banks' reliance on brick-and-mortar branches for distributing retail financial services, the number of U.S. bank branches has continued to increase steadily over time. Further, an increasing percentage of these branches are held by banks with large branch networks. This paper assesses the implications of these developments by examining a series of simple branch performance measures and asking how these measures vary, on average, across institutions with different branch network sizes. The key findings are that banks with 100 to 500 branches ...
Discussion Paper
Deposits and the March 2023 Banking Crisis—A Retrospective
In this post, we evaluate how deposits have evolved over the latter portion of the current monetary policy tightening cycle. We find that while deposit betas have continued to rise, they did not accelerate following the bank runs in March 2023. In addition, while overall deposit funding has remained stable, we find that the banks most affected by the March 2023 events are offering higher deposit rates and are growing their deposit funding relative to the broader banking industry.
Journal Article
Bank Deposit Rates Haven't Kept Pace with Yields on Other Investments, but Depositors Are Staying Anyway
Bank deposit outflows continued during 2023 despite rising deposit rates. One possible explanation is that deposit rate increases have not kept pace with rising yields on other investments. For example, spreads between bank deposit rates and yields on deposit substitutes such as money market funds have reached historically high levels. Although the outlook for deposit rates depends on the policy rate path, deposit levels are likely to remain stable under alternative policy scenarios.
Report
Banks' payments-driven revenues
The amount of fee income earned by the banking sector suggests that the significance of payment services has been understated or overlooked. This paper attempts to develop a clearer picture of the importance of payment services to the industry by delineating the payments area broadly and by analyzing data disclosed in bank holding company annual reports on sources of noninterest income. ; We find that payment services bring in from one-third to two-fifths of the combined operating revenue of the twenty-five largest bank holding companies. This contribution to revenue is considerably larger ...
Discussion Paper
How Do Deposit Rates Respond to Monetary Policy?
When the Federal Open Market Committee (FOMC) wants to raise the target range for the fed funds rate, it raises the interest on reserve balances (IORB) paid to banks, the primary credit rate offered to banks, and the award rate paid to participants that invest in the overnight reverse repo (ON RRP) market to keep the fed funds rate within the target range (see prior Liberty Street Economics posts on this topic). When these rates change, market participants respond by adjusting the valuation of financial products, of which a significant category is deposits. Understanding how deposit terms ...
Journal Article
Community Bank Funding Is Getting Costlier and Riskier
Banks’ core funding has been under pressure since the Federal Open Market Committee (FOMC) began raising rates in early 2022. As depositors shift funds out of low-yielding savings and noninterest-bearing deposit accounts and into more lucrative alternative investments, community banks have increasingly turned to longer-maturity deposits and borrowings to finance their balance sheets. Although these funding sources allow banks to retain their asset size, they are both more expensive and potentially less stable.
Banks Navigate Surging Deposits, Tepid Loan Activity since COVID-19 Onset
A surge in deposits in 2020 has created excess liquidity for banks. They are also facing tepid loan activity and lower yields on other types of investments.
Discussion Paper
Deposit Betas: Up, Up, and Away?
Deposits make up an $18 trillion market that is simultaneously the main source of bank funding and a critical tool for households’ financial management. In a prior post, we explored how deposit pricing was changing slowly in response to higher interest rates as of 2022:Q2, as measured by a “deposit beta” capturing the pass-through of the federal funds rate to deposit rates. In this post, we extend our analysis through 2022:Q4 and observe a continued rise in deposit betas to levels not seen since prior to the global financial crisis. In addition, we explore variation across deposit ...
Journal Article
Turbulent Years for U.S. Banks: 2000-20
The first 20 years of the twenty-first century have presented U.S. banks with three recessions, long periods of very low interest rates, and increased regulation. The number of commercial banks operating in the United States declined by 51 percent during this period. This article examines the performance of U.S. commercial banks from 2000 through 2020. An overall picture is provided by examining the evolution of assets, deposits, loans, and other financial characteristics over the period. In addition, new estimates of technical inefficiency are provided, offering additional insight into ...
Discussion Paper
Bank Funding during the Current Monetary Policy Tightening Cycle
Recent events have highlighted the importance of understanding the distribution and composition of funding across banks. Market participants have been paying particular attention to the overall decline of deposit funding in the U.S. banking system as well as the reallocation of deposits within the banking sector. In this post, we describe changes in bank funding structure since the onset of monetary policy tightening, with a particular focus on developments through March 2023.