New data reveals that two of the largest banks in the United States are experiencing significant decreases in deposits, resulting in billions of dollars being withdrawn. Citigroup’s quarterly earnings data shows a drop in deposits from $1.3305 trillion in Q1 of 2023 to $1.3072 trillion in Q1 of this year, representing a reduction of $23.3 billion over 12 months. Similarly, Wells Fargo witnessed a decrease of $15.1 billion in deposits during the same period, with deposits falling from $1.3567 trillion in Q1 2023 to $1.3416 trillion in Q1 2024.

In addition, JPMorgan Chase reports a 7% decline in deposits within its Consumer & Community Banking division in Q1, excluding figures from the firm’s majority acquisition of troubled First Republic Bank. However, across the entire firm, JPMorgan states that deposits remained flat when excluding First Republic.

Looking ahead, Jeremy Barnum, the CFO of JPMorgan, anticipates that deposit balances will likely remain flat or slightly decrease, as individuals seek higher returns on their cash. Barnum explains, “We expect deposit balances to be sort of flat to modestly down. So that’s a little bit of a headwind at the margin… in a world where we’ve got something like $900 billion of deposits paying effectively zero, relatively small changes in the product-level reprice can change the NII run rate by a lot.”

Meanwhile, Jamie Dimon, the CEO of JPMorgan Chase, warns that US banks could face another crisis if the Federal Reserve decides to raise interest rates. In his recent annual shareholder letter, Dimon notes that banks, along with leveraged US firms, would be in dire straits if persistent inflationary pressures compel the Fed to further tighten monetary policies.

Dimon recalls the banking crisis of May 2023 when JPMorgan purchased First Republic following the failure of two other regional banks, Silicon Valley Bank (SVB) and Signature Bank. He states, “We thought that the current banking crisis was over. Only these three banks were offside in having the toxic combination of extreme interest rate exposure, large unrealized losses in the held-to-maturity (HTM) portfolio, and highly concentrated deposits. Most of the other regional banks did not have these problems.”

However, Dimon emphasizes that the crisis was considered over as long as interest rates did not significantly rise and a severe recession was avoided. He warns that if long-end rates increase above 6% and a recession occurs, there will be considerable stress not only in the banking system but also among leveraged companies and others. Dimon highlights that even a mere 2 percentage point increase in rates resulted in a 20% reduction in the value of most financial assets, and certain real estate assets, particularly office real estate, could be worth even less due to the impact of a recession and higher vacancies. He also mentions that credit spreads tend to widen, sometimes dramatically, in a recession.

In conclusion, the deposit flight experienced by Citigroup and Wells Fargo, along with the warnings issued by JPMorgan Chase’s CFO and CEO, indicate potential challenges ahead for the banking industry if interest rates rise and a recession occurs.