The topic of deposit growth has recently come front and center – interestingly, as both a business matter and a political matter. From a business perspective, the focus has been on the demonstrated ability of the nation’s largest banks to generate significant deposit growth, leading to questions about whether greater scale is necessary for other banks to compete – for example, whether deposit gathering challenges will prompt M&A activity. From a political perspective, the focus has been on whether community banks, which remain quite popular politically, are obsolescent.
So, it seemed worth digging a little deeper on what drives relative deposit growth. The results indicate two causes of the current trend: one obvious; one subtle; and both benign.
For many years, we read with interest and deep appreciation Bob Wilmers’s annual shareholder letter at M&T Bank, and greatly missed having his thoughts this year. But, the tradition is being carried on at M&T, and this year’s shareholder letter contained some very interesting data on deposit growth.
The M&T letter does not sugar coat the trend: it notes that from 2015 to 2017, three of the largest U.S. banks increased their deposit balances more than 12 regional banks combined, and without paying above-market rates. In 2017, those same three banks opened more than 45 percent of all new checking accounts.
Two factors appear to drive this trend. The first has been widely noted, and is well summarized by M&T:
What has helped these large banks attract new customers, particularly millennials, is investment in new products and services in today’s digital era. Those institutions with the most scale vastly outspend their regional competitors in absolute dollars, while their overall size enables them to maintain a ratio of technology and marketing expenses to revenue that is similar to regional banks.
The second, also noted by M&T, is less noticed and quite interesting:
[A] shift in demographic trends seems to have contributed a substantial portion of this higher deposit growth. More than half of total deposits are concentrated in the nation’s 20 largest markets—which are home to 38 percent of the country’s population. The three largest financial institutions hold 45 percent of all deposits in those markets, significantly exceeding their 36 percent share nationally…. Six out of every ten jobs created in the United States since the crisis were added in those same 20 markets, where fewer than four of ten Americans reside. Median household income in these markets exceeds the national average by 20 percent. And nearly half of the country’s total population growth since the crisis occurred in just these 20 large metropolitan areas.
Even more troubling—small urban areas, towns and rural communities with fewer than 50,000 people are at risk of being left behind altogether. Home to 46 million Americans, or 15 percent of the population, these communities have grown a scant three-tenths of one percent in the last 10 years while the national population grew by 8 percent. Less populous areas are still losing jobs, despite the 11 percent job growth experienced in the rest of the country since 2007.
We wanted to understand this trend better, and so used U.S. Census Bureau data to compare deposit growth across urban and rural areas. A census tract is a relatively small geographic region, equivalent to a neighborhood with an average population size of 4,000 people. In the 2010 census, there were 73,163 tracts in the United States. To calculate where deposit growth was occurring, we used the Community Reinvestment Act designation to classify each tract as either urban, rural or mixed; we then associated each branch with a unique census tract. (A branch is determined to serve a given tract if it is no more than 1 mile from its center in urban areas and no more than 10 miles in rural areas. For mixed areas between urban and rural areas, we set the maximum distance to 5 miles. If a branch is determined to serve multiple tracts, the algorithm chooses the tract with the shortest distance to the branch.) Using this procedure, we were able to measure deposit growth across urban and rural areas.
Consistent with the demographic and employment trends cited in the M&T letter that indicate a significant decline in the population of rural communities and an increase in employment and income in urban areas, the chart above shows that deposit growth in the post-crisis period has been much stronger in urban areas; growth was approximately 75 percent between 2010 and 2017, which corresponds to an average annual growth rate of 8 percent. In contrast, average annual deposit growth in rural areas was 2.8 percent. Moreover, deposit growth in the post-crisis period in urban, mixed and rural communities was 88 percent, 70 percent and 28 percent, respectively across branches that existed both in 2010 and 2017. Thus, our results show that changes in the net creation of branches in the post-crisis period has had little impact in the differences in deposit growth across communities.
Having established that deposits are growing faster in urban areas, we then examined whether there were meaningful differences in deposit growth between large and smaller banks. Here, we group regional banks like M&T with the largest banks and contrast them with smaller banks; we define a large bank as one with greater than $50 billion in assets, and a small bank as one with less than $50 billion in assets. Because larger banks have more extensive branch networks in urban areas, one would expect those banks to hold a larger share of deposits and experience deposit growth commensurate with population growth in their geographic footprint. Indeed, the following chart shows that large banks hold about 59 percent of total deposits in urban communities; 10 percent of deposits in mixed communities; and less than 1 percent of deposits in rural communities. Smaller banks hold the remainder; while they too hold most of their deposits in urban communities and the least in rural communities, they actually hold more deposits in rural communities than large banks, and almost as much in mixed communities.
As shown in the chart below, depicting deposit growth by bank size and across the different communities, larger banks have seen significantly greater deposit growth than small banks in both urban communities and mixed communities; on the other hand, smaller banks have seen significantly greater deposit growth than large banks in rural communities. As shown in the previous chart, however, the share of deposits generated in rural communities is small; thus, in sum, small banks are getting a larger slice of a small and shrinking pie, and a smaller slice of a large and growing pie.
The evidence on mixed communities appears quite consistent with M&T’s message about how it plans to succeed in this environment. As M&T (and, we should note, in the voice of its new CEO, René Jones) puts it:
Overall, regional banks make 63 percent of their small business loans in the vast sections of the country that exist outside of the top 20 metropolitan areas. By contrast, the largest three institutions make 59 percent of their small business loans in just the top 20 markets. Not only do regional banks disproportionately support small business outside the largest metros, they tend to provide larger loans. The average small business loan made by all banks is $37,000—twenty percent lower than the $48,000 average made by regional banks and well below the $255,000 average small business loan made by M&T. For small business loans between $100,000 and $1 million, which often finance investments in plant and equipment or seasonal working capital, regional banks collectively advance 30 percent more funds than the three largest institutions combined. Smaller banks are particularly indispensable to the agricultural industry, where by one estimate, more than half of farm households have lost money in recent years, challenged by continued declines in commodity prices. Regional and community banks make 85 percent of all farm loans and 90 percent of loans secured by farmland.
M&T goes on to describe a strategy of serving mid-tier cities, where all metrics indicate high customer satisfaction.
And now to Occam
From a business perspective, these trends are clearly observable and readily understood. Both technology and demographics are assisting universal and regional banks that serve large and mid-sized population centers to gather a significant percentage of deposits. Community banks continue to thrive in the rural areas that they have always considered their sweet spot, and have even increased their share there. However, those areas are losing population, and therefore deposits, so community banks are shrinking relative to large banks.
The question is whether the implications of Occam’s Razor will be tolerated from a political perspective. There, the temptation is to ascribe large bank deposit growth to unfair competition or too-big-to-fail advantages or favorable regulatory treatment (though with those advantages apparently not obtaining in rural communities).
One hopes that Occam will prevail. But, it may be worth noting that the actual William of Occam was excommunicated by Pope John XXII and lived out his life in exile.
 Ensign, R. “The Problem for Small-Town Banks: People Want High Tech Services: Consumers have moved to large lenders offering online transactions; community lenders left behind struggle” The Wall Street Journal (March 2, 2019).
 Examples of a mixed community include the tracts located in Westchester, NY or Henrico County, VA.
 We did not exclude branches that have a significant amount of commercial deposits or those that are headquarter branches for direct banks, but all results are robust to excluding those branches. In addition, deposits booked in urban communities could be overstated because deposits gathered on-line tend to be booked at such branches, even if the depositor is in a rural area. Excluding deposits booked in cyber offices results in deposit growth in the post-crisis period of 71 percent, 61 percent and 22 percent in urban, mixed and rural areas, respectively.