The resurgence of surge deposits

Regulators will be looking closely at how you respond to the large cash influx driven by federal stimulus payments.

It seems like just yesterday (okay, it was a year ago) that I had just written a blog declaring the death of surge depositssignificant and abnormal deposit growth with uncertain long-term stability that financial institutions experience for any number of reasons.

In my earlier post, I noted how at the time of, and following the 2007-2009 Great Recession, the banking industry saw a substantial influx of deposits, as real estate and equity investors liquidated positions and sought safe places to store their money and ride out the storm. I further noted that, as rates for certificates of deposit plummeted during and following the economic crisis, CD holders weren’t being provided with any incentive to have their money “locked” into time deposits. As time deposits matured, CD holders routinely moved their balances into more liquid non-maturity deposits. These former CD holders were essentially temporarily “parking” their money in NMD accounts, just waiting for CD rates to return to what they believed were more “normal” levels, at which time they’d move the balances back into time deposits.

Given the potential liquidity and interest rate risk associated with those surge deposits, regulators expected banks and credit unions to review their deposit composition, identify potential surge deposits and consider the risk(s) associated with such deposits. In my 2020 article, however, I highlighted that in late 2018 and into 2019, we saw a market-wide spike in CD rates, and it was not uncommon to see one-year CD rates of near 2.75% and five-year rates of 3.25% or more. At the same time, most financial institutions left NMD rates at or near their historic low levels, which should have been more than enough incentive for surge depositors to move their “parked” funds back into CD products. The whole point of the article was to highlight that any former “surge” balances still left in NMD accounts in 2020 should no longer have been considered “surge” or be viewed as having increased volatility characteristics, thus ending the “surge deposit” era.


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