Even before the banking crisis, outflows are a sign of difficulties in keeping deposits.According to data, depositors have taken EUR214bn out of eurozone banks in the past five month, with outflows reaching a record high in February according to the European Central Bank.
The decline in eurozone bank deposits began a few months after ECB raised interest rates last summer. This marks a reversal of the large amounts that have been flooding into banks since the pandemic.
Recent outflows show that banks were having difficulty attracting and keeping depositors before the turmoil in the banking industry. This month saw the collapse of three US lenders, and Credit Suisse was forced into the arms UBS.
The decline was accelerated by depositors cutting their holdings at eurozone bank accounts by EUR71.4bn in February. This was the largest reduction in deposits since 1997, when records started. The largest drop in household deposits since 2003, when data began to be collected, was EUR20.6bn.
The five month period ending October saw withdrawals of 1.5 percent of almost EUR14tn held by eurozone banks for depositors. They were also less than the $500bn in deposits taken out of US banks over the past year.
According to the Bank of England, similar outflows of UK deposits have occurred by corporate customers. They withdrew PS20.3bn in January from British banks and building society, an unprecedented amount since 2009 when this data began to be collected. The UK’s household deposits grew by PS3.5bn.
The eurozone’s banks have not been quick to transfer higher interest rates to their depositors. Raisin, a deposit broker, said that while the ECB increased its deposit rate to 3% this month, the highest instant access rate available to savers at German banks was 1.6 percent.
This has led to a shift from instant access accounts to long-term savings accounts with higher rates. In February, overnight deposits at eurozone banks dropped EUR140bn, bringing the total drop in the past six months down to EUR512bn.
This was partially offset by an increase of deposits with an agreed maturity of up to 2 years. These rose by EUR83bn and EUR476.3bn respectively in February and June. In addition, savers have poured more money into money market funds and bank-issued debt securities.
According to the ECB, some of the withdrawn deposits were reinvested into the eurozone banks. These banks increased their funding by issuing EUR155bn bonds in six months. This was more than two-thirds long-term securities.
Jack Allen-Reynolds from Capital Economics, an economist, said that “the data show that savers continue to tie up cash in less liquid yet higher yielding forms money.”
Although depositors are decreasing their total holdings at banks in the eurozone, Allen-Reynolds stated that “they invested some money into bonds issued banks, so this doesn’t necessarily mean that customers are losing faith in our banking system.”
The total amount of banks lending to customers in the eurozone fell for the third month consecutively in February. This brings the total drop to EUR72bn over the three-month period and ends nearly five years worth of steady growth.
Economists believe that this month’s banking crisis will make lenders more cautious and reduce credit supply.
Jefferies’ banking analysts stated in a note that they expect loan growth to continue to slow over the short-term, but start recovering later when short-term rates stabilize and the economy improves.