Deposit Migration

Deposit migration is the movement of customer balances from one kind of deposit to another, from one bank to another, or out of the banking system altogether. Typical examples are savers moving money from non-interest-bearing current accounts into higher-paying savings or term deposits, businesses spreading balances across several banks, and households shifting cash into money market funds or treasury bills.

The term is used by bank treasurers, analysts and supervisors to describe changes in a bank's funding mix and their effect on costs and liquidity. It is closely linked to deposit beta, which measures how much banks raise deposit rates, and to the deposit franchise, whose value depends on deposits staying where they are. Sudden, large-scale migration driven by fear rather than price is better described as a bank run.

Imagine a large crowd at a free concert in a park. When it starts to rain, people do not leave all at once, but they gradually move under trees, into nearby cafés or home. The organisers can still see a crowd, but its shape has changed, and if the rain gets heavier the park may empty quickly.

Deposits behave similarly. When interest rates rise, money slowly moves from accounts that pay nothing to accounts that pay more, or leaves the bank for better returns elsewhere. The bank still has deposits, but they cost more and may be less loyal.

• Product migration. Balances move within the same bank from current accounts to high-yield savings or fixed-term products, raising the bank's interest cost without changing total deposits.
• Bank-to-bank migration. Customers move to competitors paying more, or to banks seen as safer, a pattern often called a flight to quality.
• Migration out of banks. Money leaves for money market funds, government securities or other non-bank products, shrinking deposits across the whole system.
• Segment migration. Large corporate and wholesale deposits tend to move faster than small retail deposits, so the overall mix shifts over time.

Rising interest rates are the main driver, because the gap between what banks pay and what savers can earn elsewhere widens. Central bank balance sheet policy matters too: quantitative tightening drains reserves and deposits from the banking system, while asset purchases add them. Technology has lowered switching costs, letting customers move money in minutes through apps. Concerns about safety, especially among holders of uninsured deposits, can cause migration towards the largest banks or into instruments backed by government debt. Promotional rates, tax changes and new products, including proposals for interest-bearing stablecoins, also influence where money settles.

Migration within a bank mainly affects profitability. Each dollar that moves from a free current account into a savings product paying several per cent raises interest expense, compressing the net interest margin even if total deposits are unchanged. Migration out of a bank affects liquidity as well: the bank must replace lost funding with wholesale borrowing, central bank facilities or asset sales, all of which are usually more expensive. If the bank holds long-dated fixed-rate assets bought when rates were low, selling them may crystallise losses. Migration also changes the bank's interest rate risk, because higher-beta deposits reprice faster than the sticky balances they replace, which weakens the natural hedge that a strong deposit base provides.

After years of near-zero rates in which deposits had swelled, the rapid rate increases of 2022 and 2023 produced widespread migration in the United States and Europe. US bank deposits declined in 2022 for the first time in decades as money moved into money market funds, whose assets reached record levels, and into treasury bills. Within banks, non-interest-bearing balances shrank and time deposits grew. The failure of Silicon Valley Bank in March 2023 then triggered a sharper movement of uninsured balances from regional banks to the largest institutions and to government money funds. Many banks saw their funding costs and deposit betas rise faster than their models had assumed.

Banks monitor balances by product, customer segment and size band, and run scenarios on how much might move under different rate paths. Responses include targeted rate increases for the most price-sensitive customers, term products to lock in funding, relationship pricing that rewards customers who use several services, and sweep and reciprocal arrangements that spread large balances across banks to keep them insured, described under deposit sweep program. Supervisors examine these assumptions in liquidity stress testing and in rules such as the liquidity coverage ratio, which assigns higher expected outflows to less stable deposits. Misjudging migration can leave a bank with a funding gap or with margins far thinner than planned.