US banks’ deposit operations have experienced a difficult few years, with total deposit balances declining 7 percent between the first quarter of 2022 and the third quarter of 2023. In 2022, the US Federal Reserve began pursuing quantitative tightening, or reducing its balance sheet by not reinvesting all the proceeds of maturing securities. It also started rapidly raising interest rates. Consequently, banks’ funding costs have risen, ratcheting up pressure on margins.
The Fed last raised rates in July 2023 and has signaled that it expects one rate cut this year. Quantitative tightening (QT) is also expected to end: the central bank started to slow the pace of its balance sheet reductions in June. As a result, commercial deposits at US banks ticked up 2 percent between the third quarter of 2023 and the first quarter of 2024, and they are expected to continue expanding for the rest of this year, potentially showing annual growth of as much as 4 percent. Emerging trends point to a similar annual growth rate for the next three years—although changes in the Fed’s actions would alter this forecast.
Boosting and retaining deposits and improving margins are likely to be top of mind for bank executives. They will need to consider nuanced deposit strategies, as clients’ price sensitivity regarding deposits has varied significantly as rates have risen.
For banks to thrive in this environment, it’s crucial that they develop and nurture deep relationships with customers, devise effective pricing strategies, and position themselves for long-term structural success by achieving the right balance in terms of markets and client segments.
The US deposits landscape
US bank deposits declined significantly in 2022 and for most of 2023 as the Fed pursued QT, but they began to recover in late 2023. Commercial deposits stabilized despite the challenges posed by the early 2023 regional banking crisis.
Strategies for striking the right balance on deposits
To thrive in this competitive environment, banks need to build deep relationships with clients, devise effective pricing strategies, and position themselves for long-term success by pursuing the right markets and client segments.
The environment for commercial deposits for the remainder of this year is expected to provide opportunities for deposits-driven growth. Banks will need to use client-specific repricing strategies and account for clients’ price sensitivity to succeed for years to come.
