In mid-2019 we wrote about the disruptive possibilities of innovation – particularly Open Banking – for bank deposit-taking and liquidity management, highlighting how novel services could change the ways customer deposits flow within the banking system. The FCA and PRA have now jointly written to the CEOs of UK banks and building societies highlighting the risks from ‘Deposit Aggregators’ – intermediaries that channel retail deposits into savings/deposit accounts – including the concentrated liquidity risks these services create.
The regulators say:
There is a risk for deposit-takers, notably for small and medium-sized firms, that deposits from a Deposit Aggregator may represent a significant portion of their balance sheet and present a concentrated liquidity risk. While the deposits from the Deposit Aggregator may come from a diversified client base, the flow of deposits sourced from a Deposit Aggregator may be correlated, as there is a single commercial relationship between the Deposit Aggregator and the deposit-taker. Firms should factor this into their management of liquidity risk and funding needs.
The regulators also have other concerns about Deposit Aggregators. Banks and building societies are expected to ensure that customers are aware of how deposit insurance coverage may be affected, and firms should also take appropriate steps to ensure reliance on Deposit Aggregators does not impede resolution. Senior management is expected to exercise ‘appropriate oversight’.
Deposit Aggregators are one of several forms of novel tools and services now at the disposal of retail customers with the potential to change how deposits behave. Customers can optimise their deposit balances between accounts and institutions more easily than ever before, and a growing degree of automation – supported by artificial intelligence – will only accentuate this further. Over time, banks may find themselves with lower average balances in traditionally more ‘stable’ deposit types as more funds are more regularly re-routed by aggregators in pursuit of higher yields. The potential for banks to lose market share rapidly to rivals may also increase; the sorts of aggregator services highlighted by the regulators could plausibly see large numbers of accounts switch institutions at the direction of a single aggregating intermediary.
This issue is now clearly on the regulatory radar. As we argued back in 2019, and as the letter to CEOs reinforces, it should be firmly on banks’ radars as well. Banks will need to remain vigilant to these trends and understand the effects on their liquidity and funding positions and strategies as the market evolves.
There is a risk for deposit-takers [...] that deposits from a Deposit Aggregator may represent a significant portion of their balance sheet and present a concentrated liquidity risk. [...] Firms should factor this into their management of liquidity risk and funding needs.