Bank Accounts Are Being Emptied, But It's Not Necessarily Due To Panic

In the wake of the sudden collapse of Silicon Valley Bank and Signature Bank earlier this month, there has been an intense consideration of the health of banks, and many people have decided not to invest in smaller banks and move their money into bigger ones.

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There were, however, new data from J.D. Power which shows that multiple retail banking customers said they were already taking cash from their primary bank accounts even before the crisis - which is now hopefully subsiding - began.

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A lot of customers are withdrawing funds from lower yielding accounts with the threat of inflation gnawing away at their account balances, in spite of rising interest rates, according to a new survey by consumer markets analytics company Ovum released on Thursday.

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In an extensive consumer survey conducted about two weeks ago, nearly one third of people said they had transferred money from a primary savings account to another provider in the past three months. This was based on field work conducted by a consumer survey company. According to Paul McAdam, J.D. Power's senior director for banking, that outbound sum was on average about 40% of the balance.

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This is a percentage of 27% who said they moved savings out of their account during March 2022, which is on average 35% of the account. These savings can either be either spent or transferred to unspecified destinations.

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Having at least $10,000 in their primary bank account is a strong indicator of the stability and strength of their primary bank, according to J.D. Power. It decreased from 44% to 28% from the previous year.

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This is a testament to why it's so difficult for those people to break up with a bank they've been using for so long, and it shows how inflation has taken its toll, as well as how higher APYs, or higher returns from more conservative investments like money market mutual funds, are pulling people away from banking institutions.

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There has been a continued trend of consumers moving their money around this month despite the fact that the vast majority of consumers clearly believe that their money will be available for withdrawing in the event of an emergency.

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According to McAdam, 93% of bank customers who answered a similar survey about saving on the move were very or somewhat confident about their bank and the ability to withdraw cash, regardless of whether they were using their own money or borrowing from the bank. In his opinion, “we are not experiencing a freak-out scenario,” he explained, adding, “your typical consumer is showing trust in the system.”

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Silicon Valley Bank and Signature Bank depositors will have access to all of their money, despite a $250,000 capped deposit insurance limit, according to the Federal Deposit Insurance Corporation. They are confident that they will be able to access all of their money, even beyond this limit.

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In addition to the banking survey, McAdam notes that it is only one way for consumers to determine how they are feeling, as regular bank users might not be as anxious about their deposit status as business owners. According to YouGov's poll, two-thirds of the population feels comfortable with both large, national banks and smaller, regional banks.

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Increasingly more people are aware that there are better rates out there, and believe that they can benefit from them. However, there are still many people who have no idea that they could be earning more interest this way.

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According to a Barclays note released on the same day as the J.D. Power survey, deposit outflows are expected to surge after "deposit rates have become less attentive" during the first quarter.

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As of September 30, Crane Data, which tracks the industry of money market funds and tracks the annualized yields on those funds, reported an annualized seven-day yield of 4.57% on the largest funds.

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A recent report by the Investment Company Institute reported a record $5.2 trillion in assets in money market funds as of September 2017.

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There has been a trend of high-yield savings accounts experiencing solid returns as a result of the Federal Reserve's series of rate hikes, and these accounts are outperforming traditional brick-and-mortar banks' rates.

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It is now reported that Bankrate.com has found that the average APY across a wide swathe of banks is 0.23%. DepositAccounts.com finds that online high yield savings accounts are now paying an average APY of 3.5%.

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The price of inflation is rising

The problem is that it's hard to distinguish between those who pull money out of their accounts because they want to take advantage of better rates elsewhere and those who do it because they need more money to cover more expensive prices. McAdam suggests that people might transfer money to cover more expensive prices when they withdraw funds from their accounts.

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Among the deposit accounts with less than $1,000 in balance since the J.D. Power survey was conducted last year, the share of accounts with less than $1,000 in balance increased to 30% from 17%.

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Because of a falling investment climate and a limp economy, Americans aren't saving as much money as they used to. The good news is that inflation has driven their savings rates down from pandemic highs reached when stimulus checks buoyed their savings.

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The Bureau of Economic Analysis, part of the Commerce Department, reported on Friday that the savings rate was 4.6% in February, up from 4.4% in January, as a result of the goal of saving for retirement.

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As compared with October, that's a rise of 3.4%, but it's down from December 2021 when it was 7.5%.

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In McAdam's view, "the affect of a pandemic-driven savings boost has absolutely disappeared. ... Our data confirms that," he added.

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It will be interesting to see how inflation rates continue to decline from four-decade highs on Friday morning. This is an important day for consumers, investors and policy makers. It was estimated that prices increased 0.3% between January and February, the Fed's preferred measure of inflation. On a year-over-year basis, prices jumped 5%, marking a drop in prices that had not occurred in more than a year and a half.