Clients of the largest U.S. banks withdrew funds this month at the fastest weekly pace since the Sept. 11 attacks as a deposit-insurance program ended and customers tapped into their year-end cash hoards.
Net withdrawals at the 25 largest U.S. lenders totaled $114.1 billion in the week ended Jan. 9, pushing deposits down to $5.37 trillion, according to Federal Reserve data released last week. The magnitude of the drop was second only to the decline after the Sept. 11, 2001 terrorist attacks, according to Jason Goldberg, an analyst at Barclays Plc.
Customers may be moving money no longer insured by the U.S., drawing down year-end balances and investing in advancing equity markets. A Federal Deposit Insurance Corp. backstop, the Transaction Account Guarantee program, ended last month, prompting some analysts, investors and organizations to predict it could drive funds from the banking system.
"What you are seeing now is probably TAG money," Subadra Rajappa, a fixed-income strategist at Morgan Stanley, said in a phone interview. "Some of the banks' corporate customers have said they were going to take the money out" if the program expires as it did, she said.
The transaction-account protections were introduced in the wake of the 2008 credit crisis and had guaranteed about $1.5 trillion in non-interest-bearing accounts above the FDIC's general limit of $250,000. The program expired Dec. 31.
Deposits closed the year at about $5.4 trillion, the highest month-end total in 2012 and more than $500 billion higher than at the end of 2011, according to Fed data.
Industry groups such as the American Bankers Association and Independent Community Bankers of America had sought an extension for TAG to keep accounts from being moved.
"We knew that fund managers would re-evaluate where they want to keep their money-in a non-interest bearing account, another account at the bank or in other investments," James Chessen, chief economist at the ABA, said in a phone interview. "If it continues there will be reason to be concerned."
Total money-market-fund assets climbed $70 billion in the two weeks ended Jan. 8 to $2.7 trillion, according to money-fund research firm iMoneyNet in Westborough, Massachusetts. Assets fell to $2.69 trillion in the week ended Jan. 15.
Some of the bank-deposit moves may be year-end balance-sheet management by corporate customers, according to Chessen and strategists including Alex Roever at JPMorgan Chase & Co. and Bank of America's Brian Smedley. Rajappa said it's too early to say for sure what caused the drain of deposits.
The 25 largest banks lost almost $53 billion of deposits once seasonal variations are taken into account, according to the Fed data released Jan. 18. That shows some of the decline is tied to "calendar-related effects," Roever said.
"You see a run-up in deposits at year-end and then a draw- down after the start of the year," he said in a phone interview.