ZIRP Blowback: Savers Flee Banks' Zero Interest Deposit Accounts

At a time when interest rates are finally increasing with some consistency, although about a decade too late, banking customers are finally taking their money out of non-interest bearing accounts and moving it to high(er)-yielding alternatives. This, as we noted in recently when discussing Wells Fargo's latest earnings, will put pressure on many major banks' profits moving forward.

The four big US money-center banks, Bank of America, Wells, Citigroup and JP Morgan, all reported a combined 5% drop in US deposits to non-interest bearing accounts in the third quarter. Customers took out more than $30 billion from these types of accounts in the 12 months leading up to June 30. This represents the first decline from these accounts in more than a decade, according to FDIC data reported on by the Wall Street Journal.

Most of these deposits are consumer checking accounts and business checking accounts. Banks like them because they are of no cost to the banks, who can use the money for loans which they than collect interest on without a corresponding payment. As rates begin to rise, the spread widens and non-interest bearing accounts become even more lucrative for banks.

That spread had continued to grow for the last couple of years, but customers are now starting to get wise to the fact that they could be earning meaningful interest elsewhere, and this has catalyzed a steady wave of outflows from these accounts.

Allen Tischler, a Moody's senior vice president told the Wall Street Journal that "deposits that earn no interest are the crown jewel of the bank funding base. You start losing that and you end up not being able to benefit from future rate increases."

In response to the Fed manipulating moving rates toward zero for nearly a decade after the housing crisis, many consumers opted not to move money from these accounts, as rates in money market and savings accounts were insultingly low (technically, non-existent).

Government also helped convince consumers to keep their money in these non-interest-bearing accounts by offering unlimited insurance for many of them in the years following the crisis. Many corporate customers took advantage of the fact that keeping money in non-interest-bearing accounts helped them avoid paying fees on other bank products and accounts. The savings in fees was often worth more than the interest they would have accrued with rates so low.

Over the last couple of years, banks slowly started to pay out slightly higher rates to wealthier customers and some corporate accounts, but by and large with a material delay and for the most part have avoided passing on the benefits of the rate hikes to most of their consumers. But the trend is slowly starting to change. Non-interest-bearing deposits are down to 26.3% of domestic deposits in the second quarter from 27.5% of domestic deposits a year ago. That amounts to roughly $30.6 billion dollars less moving into these accounts.

Gerard Cassidy, an analyst at RBC Capital concluded: "Non-interest-bearing deposits are the goose that lays the golden egg for a bank. Their decline is one reason the profit boost from rising interest rates will likely end over the next year or so."

Meanwhile, as funds in conventional, zero-interest checking accounts begins shrinking, the winners will be those banks - such as Goldman Sachs, which are aggressively pushing to attract deposits with higher rates, such as the following:

  • Customers Bank: 2.25%
  • CIBC Bank USA: 2.16%
  • CIT Bank: 2.15%
  • Citizens Access: 2.12%
  • Goldman Sachs Bank: 1.95%
  • American Express National Bank: 1.90%
  • Barclays Bank: 1.90%