June 03, 2022

### Understanding Bank Deposit Growth during the COVID-19 Pandemic

Andrew Castro, Michele Cavallo, and Rebecca Zarutskie1

##### Table 1A: Net Purchases of Marketable Treasury securities (2020-2021)
Billions of Dollars % Contribution to Total 775.6 13.1 -743 -11.2 692 11.7 3497.4 59 267 4.5 477.7 8.1 652.4 11 309.4 3.9 5928.5 100

Source: Financial Accounts of the U.S. - Z.1

##### Table 1B: Net Purchases of Agency and GSE-Backed Securities (2020-2021)
Billions of Dollars % Contribution to Total 1304.3 105.5 -121.5 -9.8 -385 -31.1 -418.4 -33.8 1238.7 100.2 -170.5 -13.8 -81.6 -6.6 -104.1 -8.4 -25.3 -2 1236.6 100

Source: Financial Accounts of the U.S. - Z.1

A final factor that contributed to the rapid and sustained growth in deposits during the pandemic was the historically high savings rate. In April 2020, the personal savings rate skyrocketed from around 8 percent to nearly 35 percent, as households cut their consumption expenditures.15 Given the greater economic uncertainty, households—especially those with greater labor income uncertainty—as well as businesses were more likely to keep their savings in very liquid bank deposits rather than move their savings to illiquid assets, some of which would have then moved outside the banking system.

In addition to the personal savings rate moving higher, the federal government began making stimulus payments to households in 2020 and 2021 through direct payments, extended unemployment supplementary payments, and augmented the child tax credit through legislation such as the CARES Act and the American Rescue Plan, which raised the incomes of many households. Likewise, through the paycheck protection program (PPP), the federal government made loans directly to small businesses that would be forgiven if those firms spent a certain portion of the funds on wages of employees. Moreover, many households were able to defer payments on mortgages and other debt during the pandemic period, which enabled them to keep more of their wages and stimulus payments as savings.

As the stimulus payments were made, a wide swath of households across the economy received boosts to their deposit accounts. This pattern can be observed in Figure 6 in which retail, or household, deposits, shown by the dashed red line, rose more quickly relative to non-retail deposits beginning in the second half of 2020 and early 2021.16 In further support of the idea that fiscal stimulus payments contributed to deposit growth, Figure 7 shows that the growth in deposits was broad-based, as it was widely spread over all types of banks—especially later in the pandemic period when stimulus payments were made—including the largest GSIBs as well as smaller regional and community banks. In addition, stimulus payments were made to households in many different geographic areas and banking markets, finding their way to the deposit accounts of small and large banks, alike.

##### Figure 7. Indexed Deposit Change by Bank Category

Data from the U.S. Financial Accounts, shown in Table 2 broadly confirm the evidence provided in Figure 6. Specifically, household deposit balances at banks (the sum of checkable, time, and savings deposits) rose by substantially more than deposits held by nonfinancial businesses between 2019:Q4 and 2021:Q4, accounting for nearly two-thirds of the overall increase in aggregate deposits.

##### Table 2: Deposit Balances at Banks (2019:Q4 - 2021:Q4)
Change (Billions of \$) Contr. to % change (percent) 3819.7 24.6 1322.4 8.5 149 1 161.5 1 5452.7 35.1

Source: Financial Accounts of the U.S. - Z.1

Overall, the evidence we present supports the idea that the unprecedented increase in deposits at U.S. commercial banks can be explained in part by fiscal stimulus that channeled deposits to households and businesses who kept the deposits as savings within the banking system or spent those deposits in a manner such that they stayed in the U.S. banking system. During the pandemic period, the U.S. Treasury received funding from investing institutions and households through the issuance of Treasury securities and then subsequently made cash payments to other households and businesses with a comparatively higher propensity to hold those amounts as deposits within the U.S. banking system. The Federal Reserve's asset purchases also led to deposit creation as did the loans and securities purchases made by banks.

#### Conclusion

As of the time of writing, deposits as a ratio to GDP stand at a historically high level, with deposits having sustained a rapid pace of growth since the onset of the COVID-19 pandemic. This note documents that this unprecedented growth in deposits was driven in large part by four factors: 1) a rapid drawdown in C&I lines of credit by firms seeking precautionary liquidity at the onset of the pandemic; 2) the Federal Reserve's asset purchases; 3) fiscal stimulus that increased the incomes of many households; and 4) a higher personal savings rate, especially among households likely to hold their savings in liquid bank deposits.

Reflecting these developments, banks remain flush with deposit funding. Macroeconomic trends, however, suggest a few reasons to expect that, going forward, deposits will decline as a share of banks' funding and of household savings as the economic expansion continues and as interest rates rise. Households may spend down the large level of accumulated deposits, further fueling economic growth and loan demand. In fact, in recent months the personal savings rate has been declining, which could foreshadow a slowdown in deposit growth at banks. Furthermore, as households spend their accumulated deposit savings, some of those deposits could eventually leave the banking system; for example, corporations may move some of the deposits they receive from higher consumer spending outside of the banking system. As interest rates rise, households and other depositors may move their deposits to higher yielding MMFs. Macroeconomic trends could also see a pickup in loan demand, and banks' may be generally well positioned to fund loans should demand for credit increase given their holdings of liquid securities and high reserve balances. Such a pickup in loan growth would serve to grow banks' deposits. However, higher consumption by households from their accumulated deposits could also affect banks' decisions regarding how to fund such loan growth as retail deposit account balances decline. Banks may have an incentive to raise interest rates paid on certain deposit accounts or seek to raise funding elsewhere to fund loan growth if the owners of deposit accounts begin to spend their balances down rapidly or move them to higher-yielding MMFs. Banks' incentives to raise interest rates on deposit accounts could also be further magnified as interest rates rise due to the removal of monetary policy accommodation. Additionally, a reduction in the Federal Reserve's securities holdings would drain reserves and deposits from the banking system and may also prompt some banks to raise interest rates paid on certain types of deposit accounts or cause banks to seek to attract additional forms of non-deposit funding.

#### Appendix: Deposit Creation by Federal Reserve Asset Purchases and Commercial Bank Lending

Actions by commercial banks and the Federal Reserve affect the total amount of deposits in the banking system. In this appendix we discuss the mechanisms through which deposits are created and what determines when those deposits leave the banking system.

When the Federal Reserve purchases securities from a nonbank seller, it creates new bank deposits by crediting the reserve account of the depository institution at which the nonbank seller has an account, and then the depository institution credits the deposit account of the nonbank seller. If the Federal Reserve buys the security from a bank, no new bank deposits are created. While reserves are created in this case, the size of the bank's balance sheets does not increase because the value of the security is swapped with an equivalent dollar value of reserves on the assets side of the bank's balance sheet. In contrast, purchases of securities from the nonbank private sector will increase the size of a bank's balance sheet, by creating both reserves on the assets side and deposits on the liabilities side.

When banks make loans to nonbanks or buy assets, such as marketable securities, from nonbanks they create new bank deposits by transferring the loan or payment amount to the borrower or security seller. That amount then shows up as a deposit in the borrower's or security seller's bank account. Banks can also purchase securities domestically from households, nonbank financial entities, and the government. When banks purchase securities from households and nonbanks, aggregate deposits directly increase by the amount corresponding to the value of the securities associated with the transaction. In this situation, once a bank purchases securities either from a household or a nonbank entity, the bank moves a corresponding amount of reserve balances to the reserves account of the bank at which the household or the nonbank holds the deposit account. Thus, the purchasing bank experiences a change in the composition of its portfolio, having more securities and less reserves. With regards to the receiving bank (i.e., the bank at which the seller of the securities holds its deposit account), it receives more reserves, and, at the same time, it credits the deposit account of the seller of the security. Thus, the aggregate level of reserve balances does not change. What changes is the distribution of reserves among banks. Ultimately, the purchasing bank has fewer reserves and more securities. The seller of the securities has more deposits and less securities, and the bank of the seller has more reserves but more deposits as liability.17

When a bank purchases securities directly from the government, the bank pays by drawing down the balance on its reserves account at the central bank by an amount corresponding to the value of the securities. Meanwhile, the same amount is credited to the account that the Treasury holds at the Federal Reserve, that is, the Treasury General Account (TGA). Thus, after this first round of transactions, the size of the bank's balance sheet has remained the same, but its composition of its assets has changed, as the bank holds more securities and less reserves. Once the government makes payments or provides fiscal stimulus using the funds financed by the sales of the securities, the central bank draws down the TGA by the amount of the stimulus and then credits by the same amount the reserves accounts of the banks at which the beneficiaries of the stimulus payments hold their deposit accounts. Thus, once government disburses the funds received from the securities sales, the balance of the TGA goes back to its initial level, and aggregate level of reserve balances in the banking system again rises. But, after the reserve accounts of the banks at which the stimulus recipients hold their deposit accounts have been credited, the banks then credit by corresponding amounts those same deposit accounts. Therefore, all in all, the aggregate level of reserves has remained the same as it was before the banks purchased the securities and only its distribution across banks might have changed. But the size of the aggregate banking sector's balance sheet has become larger. Ultimately, banks hold more securities in their portfolio and the counterpart of this is higher aggregate deposit balances.

Whether deposits stay in the banking system depends on the behavior of the firms and households who received those deposits. Newly created deposits might stay within the banking system if they are used to purchase something else—either a consumption good, an investment good, or a security—which ultimately results in the deposits being sent to the bank accounts of households, businesses, or nonbank financial institutions at the other side of the purchase transaction. On the other hand, the deposits may leave the banking system if the holder of the deposits exchanges them for a different bank liability, such as longer-term bank debt, or if the deposits are used either to buy shares in a money market mutual fund, which then uses those deposits to buy alternative bank liabilities or Treasury securities directly from the U.S. Treasury department, or to invest them in the Federal Reserve's Overnight Reverse Repurchase (ON RRP) facility.18 Deposits may also leave the U.S. banking system if payments are made to foreign entities and deposits move to the non-U.S. banking systems, or if borrowers pay down their bank loans. As such, while certain actions by commercial banks and the Federal Reserve may increase the amount of deposit balances in the banking system initially, over time it is the decisions on how to spend or invest those deposits by households, businesses, and the government that determine whether those deposits stay in the U.S. banking system.

#### References

Glancy, David, Max Gross, and Felicia Ionescu (2020). "How Did Banks Fund C&I Drawdowns at the Onset of the COVID-19 Crisis?" FEDS Notes. Washington: Board of Governors of the Federal Reserve System, July 31, 2020.

Kapan, Tumer, and Camelia Minoiu (2020), "Liquidity Insurance vs. Credit Provision: Evidence from the Covid-19 Crisis," working paper.

Levine, Ross, Chen Lin, Mingzhu Tai, Wensi Xie, "How Did Depositors Respond to COVID-19?", Review of Financial Studies, Volume 34, Issue 11, November 2021, Pages 5438–5473.

Li, Lei, Philip E. Strahan, and Song Zhang. (2020). "Banks as Lenders of First Resort: Evidence from the COVID-19 crisis." Review of Corporate Finance Studies 9.3, pp. 472-500.

1. Federal Reserve Board, Division of Monetary Affairs. The analysis and conclusions are those of the authors and do not necessarily reflect the views of the Board of Governors of the Federal Reserve System of other members of its staff. We thank Mike Batty, Marco Cagetti, Rochelle Edge, and Min Wei for useful comments and suggestions. Return to text

2. Bank deposits are a specific liability of banks as well as a form of money and are included in the definition of monetary aggregates as reported in the Federal Reserve's H.6 statistical release. In this note, bank deposits include all transaction and non-transaction deposit accounts, generally corresponding to the line item "Total Deposits in domestic offices" in Schedule RC-E in the Call Reports (FFIEC 031/041). This broad definition includes all savings deposit accounts and time deposits, as well as demand deposit accounts. Return to text

3. Bank credit includes loans and leases as well as securities holdings of commercial banks. Securities holdings are primarily comprised of Treasury securities and agency MBS. For more information see the H.8 statistical release. Return to text

4. The ratio of bank credit to nominal GDP also spiked to around 75 percent at the onset of the pandemic as firms drew down their credit lines with banks to build their liquidity buffers, but subsequently retraced as firms repaid those loans as financial market functioning returned to pre-pandemic levels. As a result. the deposits-to-GDP ratio stood 10 percentage points higher than the bank credit-to-GDP ratio, the widest gap recorded in the time series. Return to text

5. In coordination with the Treasury Department, the Federal Reserve also established several emergency lending facilities to support functioning in other markets, such as commercial paper, corporate bond, and municipal bond markets. For a more complete listing and description of these actions, see https://www.federalreserve.gov/funding-credit-liquidity-and-loan-facilities.htm Return to text

6. See https://www.federalreserve.gov/releases/h8/current/default.htm as well as Kapan and Minoiu (2020) and Li, Strahan, and Zhang (2020). Return to text

7. The Appendix reviews in more detail how both Federal Reserve securities purchases and bank lending can add to the level of deposits in the banking system. Return to text

8. Deposits initially created by the Federal Reserve's asset purchases need not stay in the banking system as explained in the Appendix. Moreover, deposits can continue to grow as banks lend or purchase securities. As such, our calculations show to what extent reserves growth was matched by deposits growth. Return to text

9. The cumulative growth in reserves depicted in Figure 4a is a less than aggregate cumulative reserve growth because the underlying sample excludes U.S. branches and agencies of foreign banks as well as thrifts and credit unions. Return to text

10. The aggregate level of reserves can also fluctuate through changes in the Treasury General Account (TGA), take-up in the Overnight Reverse Repurchase Facility (ON RRP), or with changes in other non-reserve liability items on the Federal Reserve's balance sheet. However, since the start of the pandemic, the largest driver of reserves has been the Federal Reserve's purchases of Treasury securities and MBS. See https://www.federalreserve.gov/releases/h41/. Return to text

11. Many firms kept some of these draws as precautionary savings within the banking system and generally these credit line draws were matched by increases in aggregate bank deposits, although, as discussed by Glancy, Gross, and Ionescu (2020), there was heterogeneity in the degree by which C&I loan draws were funded by deposits at individual banks in the first quarter of 2020. Return to text

12. The generally weak level of demand for loans, combined with generally tighter lending standards at banks also contributed to the weak loan growth in later quarters of the pandemic. See, for example, the results of the October 2020, January 2021, April 2021, and July 2021 Senior Loan Officer Opinion Surveys at https://www.federalreserve.gov/data/sloos.htm. Return to text

13. The remaining gap between the gray line and the 45-degree line can be primarily explained by banks reducing other types of liabilities, such as Federal Home Loan Bank advances and other types of short-term debt, on their balance sheets. Increase in other assets, such as trading asset, also have played a role. Return to text

14. In Table 1A, from net purchases (and net issuance) of Treasury securities in the Financial Accounts of the U.S., we have removed the amounts relative to nonmarketable Treasury securities. Moreover, from the line item corresponding to net purchases by households we have excluded net purchases by domestic hedge funds, which are instead included in the "Others" line item. Net purchases of Treasury securities by domestic hedge funds in 2021:Q4 are estimated by projecting off of net purchases in 2021:Q3 the average change in net purchases registered between 2021:Q1 and 2021:Q3. Return to text

15. Levine, Lin, Tai, and Zhe (2020) present evidence that the cross-sectional variation in bank deposit inflows at the onset of the pandemic in 2020 was due in part to differences in precautionary savings by households at different levels of unemployment risk. See the Appendix for a discussion of the how deposits may be created in the banking system and also leave the banking system. Return to text

16. Non-retail deposits growth has also been strong during the pandemic consistent with the creation of deposits from the Federal Reserve's asset purchases as nonoperational deposits as well as the growth in firms' operational and nonoperational deposit accounts during the pandemic through their normal business activities. Return to text

17. If banks make loans to or buy securities from other banks, no new deposits are created. Rather, the lending bank gives reserves to the borrowing or selling bank and receives in return a loan or a security which it books as an asset. The borrowing or selling bank will receive additional cash or reserves. In the case in which a bank borrows from another bank, the borrowing bank will also book a loan due to the lending bank as a liability. Return to text

18. In the latter two instances, the deposits leave the commercial banking system and are placed directly with the Federal Reserve through the Treasury General Account (TGA) or through the ON RRP and, consequently, reserve balances in the banking system fall by a corresponding amount. Deposits may also leave the banking system if the depositor withdraws those deposits as currency or cash which is then used for subsequent payments outside the banking system. Of course, the cash may eventually return to the banking system as deposits if the holder places them back in a bank account. Return to text