Why have the deposits at the UK's four largest banks, including NatWest, Lloyds and HSBC declined?

The deposits at the UK's major banks, namely NatWest, Lloyds, HSBC, and Barclays, have encountered a substantial decrease of approximately £80 billion over the last year. This decline can be attributed to a combination of factors. Firstly, retail and corporate customers are seeking higher interest rates for their savings, which has prompted them to explore alternative options. Concurrently, households are grappling with escalated living costs, leading mortgage holders to pay off their loans early in order to mitigate potential financial strains arising from higher interest rates.

In the 12 months leading up to June 2023, the "big four" banks collectively witnessed total outflows of around £78 billion. Although these banks still retain roughly £240 billion more in deposits compared to 2019, they are facing intensified competition from other lenders that offer more attractive interest rates. As a result, customers are transitioning from current accounts at major banks to savings or fixed-term deposits at smaller peers. Benjamin Toms, an analyst at RBC Capital Markets, emphasizes that this migration is particularly notable among retail customers, while in the corporate sector, the hunt for higher yields from corporate Treasury departments is driving significant changes.

Smaller businesses have also contributed to this shift as they repay government-backed loans, which had remained unused in their accounts, obtained during the pandemic. Additionally, customers with surplus deposits have opted to pay down debts, including mortgages and credit cards, in response to an increased cost of living.

In light of the current environment of elevated interest rates, banks are facing pressure to promptly pass on the benefits of these higher rates to their savers. The House of Commons Treasury select committee has criticized major banks for profiteering by withholding benefits from loyal savings customers. The Financial Conduct Authority (FCA) has also set a deadline for banks to justify low interest rates or face penalties. Consequently, major banks are improving rates on instant access accounts, albeit lagging behind some rivals. Despite these measures, the outflows are driven by various reasons, including consumers withdrawing funds to repay mortgages early, influenced by the desire to offset potential expenses due to higher rates.

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