It’s not all a challenge for banks. Invictus notes that even though banks will need to pony up more cash for deposit insurance, and may struggle with lower values on deposits, at least the cost of bank deposits will decline and riskier bank investments like brokered deposits and repurchase agreements will see lower investor demand.
Here’s a more detailed picture at the impact of the rush from equities and into bank deposit investments will mean to banks, according to Invictus:
• In the near term, banks will see a continued reduction in the value of bank deposits, reflecting the dramatically reduced interest rate environment and reduced need for liabilities given the reduced loan demand.
• Deposits from the recent money flow will be more volatile, having a shorter average life and responding more quickly to global market developments. These deposits will be the first to be tapped for market reinvestment once there is a hint of stability in the equity markets, leaving banks in a difficult funding position when loan demand increases.
• Community bank valuations, historically supported by the strength of their core retail deposit base, will decline as market conditions shift the focus toward the challenge of maintaining loan volumes in the face of reduced loan demand and increased competition.
• The focus of bank acquisitions will increasingly shift from acquiring low-cost, long-term deposits towards loan-oriented acquisitions.
• Bank branches previously used to attract deposits will lose value as the costs associated with maintaining these facilities become burdensome relative to the value of the deposits they generate. This may result in more branch closures and layoffs.
There’s an old Chinese fortune that says “may you live in interesting times.” That goes double for investors and for U.S. banks, too.
But right now, things just may be a bit too “interesting” for both parties.