Bank Depositors Fly to Quality

October 16, 2008

It’s well-known that bond investors flew to quality last month, buying up short-dated Treasuries at fantastic rates (chart courtesy of Curious Cat).  In a world where anyone could go bankrupt as the financial system melts down, who cares about yield?  Investors are more concerned with principal protection.  They trust Uncle Sam to pay back debts, even he has to run the printing press, so Treasuries are perceived as “riskless.”  Over the long-term inflation is a threat, but no one cares about inflation next year when they think their bank could implode next week.  Apologies I don’t have a more updated chart, but know that yields on the 3-month are still very low at 0.20%.


Bank depositors are also flying to quality.  Today the Journal published this chart, showing bank depositors flying to the two largest banks: B of A and JP Morgan.  Are they the two safest?  I haven’t studied their balance sheets in detail, so I can’t offer an informed opinion.  But being the largest, the government won’t let them go under.  That’s why I’ve split my savings account between these two.

Citigroup reported Q3 results this morning, so it isn’t included in the chart.  But its domestic operations also benefited from the flight to quality, as U.S. deposits climbed nearly $17 billion or 6% in the quarter.  (International deposits declined 7%, however, pushing overall deposits down 3%….)

JPM’s number is boosted significantly by the acquisition of Washington Mutual.  Backing out the acquisition, JPM’s “same-store” deposits still grew a whopping $60 billion in the quarter, up 8%.  Not quite the $90 billion increase for B of A, but still pretty good.   That should give Jamie Dimon something positive to consider while he’s ruminating about how terrible everything is.

The chart doesn’t include WaMu, which saw an outflow of nearly $17 billion in deposits in the nine-days before it was seized and sold off.  That outflow was despite ridiculously high CD rates of 5%.  Let that be a lesson to you savers out there.  If a bank offers CD rates that seem too good to be true, they probably are.

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