The real cost of the banking crisis: customers want interest
Non-interest deposits migrate to paid accounts
JPMorgan Chase kicked off the first-quarter bank earnings season with a spectacular financial performance, delivering record net revenue of $38.3 billion and a 52 per cent surge in net income. The Wall Street titan rode its status as the ultimate safe haven to capture $50 billion in deposit inflows during the March regional banking panic. Yet beneath Jamie Dimon’s triumphant headlines lurked a structural warning that will define the rest of the banking cycle: the true, enduring cost of the regional banking crisis is that depositors have finally awoken to interest rates, and they are demanding to be paid.
For a decade, commercial banks enjoyed an ocean of non-interest-bearing deposits—checking accounts and operational cash balances that sat passively yielding zero while banks earned market rates on assets. This free funding was the foundation of commercial banking profitability.
The End of Free Money
The March crisis acted as an alarm clock for millions of corporate treasurers and affluent individuals. Even at JPMorgan, non-interest-bearing deposits declined by 8 per cent in the quarter as customers moved funds into interest-bearing savings certificates, Treasury bills, or money market funds.
Across the regional banking sector, the migration is an existential crisis. To retain balances, small and mid-sized lenders are being compelled to hike deposit betas violently, offering 4 to 5 per cent certificates of deposit to prevent depositors from migrating to Wall Street giants or money market funds.
Margin Compression Ahead
The era of funding 4 per cent loans with 0.1 per cent deposits is permanently closed. As banks reprice their liabilities at 4.5 per cent, net interest margins will experience an unsparing contraction throughout the second half of 2023.
JPMorgan and its mega-bank peers may have won the battle for flight-to-safety deposits, but the war for cheap funding is already lost. The banking crisis did not destroy the banking system, but it permanently destroyed the commercial bank’s most lucrative privilege: access to free customer cash in a five per cent world.