One Sign That the Competition for Deposits Is Really Heating Up

Remember when pandemic-prompted stimulus spending left banks with wads of cash deposits? At that point, in the not-so-distant past, bank liquidity was hardly an afterthought. 

 Fast forward to the second half of 2022. With inflation spiking and the Fed raising interest rates, banks suddenly found themselves in competition for customers moving cash out of deposit accounts and into higher-yielding products such as money market funds.  

Now comes word that some banks are fighting back by awarding bonuses to employees who are instrumental in attracting or retaining deposits. An official at Berkshire Hills Bancorp in Boston told S&P Global that the incentives are a way to keep the bank’s wholesale funding—which banks are increasingly turning to as deposits dwindle—at a “manageable number.”  

As deposit costs rise, banks are getting a larger portion of funding from wholesale sources like the Federal Home Loan banks, with the borrowing in federal funds recently marking its highest level since at least 2016. 

The outlook? With liquidity challenges expected to persist, banks will either be hampered in their ability to lend in the months ahead, or will pay more to do so—cutting into profits. Community banks, in particular, have been warned to brace for continued challenges in 2023.