Commercial Deposit Balances: Early Indicators

April 1, 2020 Dallas Wells

A man who carries a cat by the tail learns something he can learn in no other way.

Mark Twain


Bankers who were around for the 2008 financial crisis still carry many of the scars. In Mark Twain terminology, they carried a lot of cats by the tail, and the subsequent lessons were forever imprinted on their memories.

Over the last couple of weeks, governments and central banks around the world sprang into action in response to the COVID-19 pandemic. Here in the U.S., we saw multiple emergency rate cuts, a litany of Fed backstops to calm credit markets, and then topped it all off with the multi-trillion dollar CARES Act. With daily headlines like these, and the market volatility that goes along with them, it was hard not to have some flashbacks to 2008. And I’m not the only one; most of the bankers I’ve talked to are feeling the same way: “Gosh, this feels like 10 years ago.”

That means bankers are wondering if they will face some of the same pressures and might just need to apply the hard-won knowledge from carrying so many cats a decade ago. We’ve fielded lots of questions about credit structures and trends, and for the most part, bankers seem to be settling into their new reality. They’ve also moved on from the short-term, acute questions (Where the heck should we be putting the floors on the variable rate loans?) and are now onto some of the more existential questions. Two of the biggest questions are related to deposits.

  • Will banks see the same influx of surge deposits that they saw following the 2008 financial crisis?
  • Are customer deposit accounts showing early signs of future credit risk?

Surge Deposits

It is understandable why banks would be leery of surge deposits. In a near zero rate environment, an influx of new liabilities are nearly impossible to invest at a positive spread. With so much liquidity entering the market via the Fed, it is certainly a possibility. A recent article from S&P highlights some early spikes in balances, much of which seems to be driven by large corporate customers drawing on lines of credit and then parking the funds in their deposit accounts to weather the crunch from COVID-19.

Commercial banks have experienced pikes in both deposits and lending in recent weeks.

Will this trend continue? Should banks use the post-2008 winning strategy, which was to force the cost of funds as close to zero as fast as possible? It’s too early to tell. Much will depend on the length and depth of the recession that follows the pandemic itself. And while many of the Fed actions have been the same, the circumstances around this episode are much different, including changed depositor behavior and a new batch of competitors. 

Credit Risk

The bigger concern from most banks is the potential for credit losses. The industry hasn’t faced an issue like COVID-19 in modern times, and it is difficult to tell how much of the economic damage is temporary and how much is longer term destruction. Deposit activity of commercial customers can serve as a canary in the coal mine of sorts, showing potential red flags in cash flow.

While there are clearly issues with some individual customers, we dug into the account level data of 150+ PrecisionLender clients to see if there are any early signs of systemic changes in deposit balances. Note that this data will look different from that above in the S&P charts. Those are largely driven by major corporate activity at the nation’s biggest banks – a small number of institutions. We count some of those as clients, but we have filtered the data to reflect small business and middle market deposit accounts, so the largest balances don’t drown out any underlying signal.

The results are eye opening.


The average balance of an interest-bearing transaction account (NOW and Money Market accounts) is down more than 7% from the first quarter of 2019 (to capture seasonality) and down nearly 5% from the fourth quarter averages.

At first blush this could be rate related, as the Fed Funds rate is down 250 basis points since early 2019. But the other account types don’t seem to support that. Demand Deposits (zero interest checking accounts) are also down, and time deposit averages are higher.

Instead it seems that a wide swath of commercial customers are seeing cash balances decline (hence the need for the CARES Act). It is also worth noting that the standard deviation on these account balances is rising week to week. Some bank customers are doing well, and some are skidding into dangerous territory. 

Banks face a unique challenge in the coming days: Those able to proactively identify customers in trouble and help them survive will fare far better than those that cannot. Agility will be rewarded perhaps like no other time in banking.

Have Questions? 

We are monitoring these metrics on a weekly basis and will continue to provide updates as things progress. Please reach out if you have questions, or would like to discuss the implications for your bank. You can email us at

About the Author

Dallas Wells

Dallas is a writer, speaker and former consultant who has held executive roles at two banks with experience in capital planning, liquidity forecasting, investments, budgeting, financial reporting and mergers and acquisitions.

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