Why it's not that great that everyone is flocking to their online bank
- Smaller and regional banks are important for the US financial system.
- Banking turmoil earlier this year has eroded trust in these smaller firms.
Online banks are winning the deposit wars, and this should be on all our radars.
Of course, this is no surprise given the banking turmoil earlier this year, but while it may seem like the obvious move to go with a big name bank like JPMorgan, Wells Fargo or Citibank, smaller and regional banks are key to the US financial ecosystem.
They're particularly important for lending in commercial real-estate, which include things ranging from office buildings to strip malls to warehouses. And any pullback in lending by smaller banks could hurt small and midsize businesses, as well as borrowers who are located far from major cities and urban centers.
"Regional banks have a combination of regional knowledge and expertise that makes lending more efficient," C. Michael Zabel, a former executive at M&T, the Buffalo-based regional bank, told Dealbook in April. "They're also more likely to put deposits to work in their community."
Broadly, regional banks are staring down two main headwinds. First, the trust of their customers was eroded after the banking crisis, pushing them to start keeping money at at only the biggest lenders. Plus, the Federal Reserve's interest-rate-hike bonanza prompted customers to move money to Treasurys and money-market funds that now offer higher yields than the banks are able to.
This can be seen in shifting deposits. In the first quarter, Ally Financial and Goldman Sach's Marcus online bank saw them rise, while regional-bank powerhouses like US Bank, Truist Financial, and Citizens Financial saw deposits fall, according to The Wall Street Journal.
Deposits at US banks collectively fell by the most on record in the first quarter, according to Federal Deposit Insurance Corp. data
Online banks — particularly high-yield savings accounts — offer higher savings rates than brick-and-mortar banks, and they've gotten even higher as the Fed kept raising interest rates. Currently, they're around 4% according to NerdWallet, while the national average yield for savings accounts is 0.25% APY, according to Bankrate's May 31 weekly survey of institutions.
The pressure on regional banks hasn't abated yet. The KBW Regional Banking Index is down 30% since the start of the year, and it's off 9.5% since May 1, when JPMorgan stepped in, Bloomberg reported.
"There's no way that we'll be able to finance production and startups and small businesses in every region of the country if the only banks we have are a few gigantic banks located either in Wall Street or San Francisco," Robert Hockett, a law professor and expert on public finance at Cornell University, told CNN.
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