U.S. banks have lost around a trillion dollars in deposits over the past year. That money hasn’t come back, and it may never will—signaling a new era of banking, says Blackrock.

In its recent report, BlackRock described a tectonic shift for one of the pillars of the American economy. In 15 months, 6% of all bank deposits have left for alternative investments.

BlackRock thinks the banking sector’s decline is “a catalyst that is likely to create opportunities for non-bank lenders.”

How banks lost a trillion dollars

In March, Silicon Valley Bank (SVB) – the 16th largest bank in America – failed.

Businesses and individuals with money in SVB feared that their deposits were lost, until the government stepped in with a bailout, compensating all customers in full.

The same day that bailout was announced, the government seized Signature Bank (19th largest), in anticipation of its failure. Two months later came First Republic (14th), following largely the same script.

So many high-profile bank failures in such a short period of time, “put a spotlight on the risks of uninsured deposits, especially at U.S. regional banks, and accelerated a shift out of bank deposits and into money market mutual funds,” BlackRock analysts explained.

Chart of US money market and deposit flows
Source: BlackRock 2023 midyear outlook

According to BlackRock, the loss in deposits is causing banks to slow their lending, and encouraging smaller banks to consolidate.

And the loss of trust in the sector is affecting not just where people choose to park their money, but where people choose to borrow, with “more demand for non-bank lending and private credit to fill that void,” they noted.

Private credit involves borrowing from non-bank lenders. Lenders are often asset management or private debt firms, and small and medium-sized companies make up the bulk of private borrowers.

Chart of private and public credit yields
Source: BlackRock 2023 midyear global outlook

“We expect more borrowers to turn to private credit as it becomes relatively better priced and given the certainty of execution and long-term partnership private lenders can provide,” the analysts wrote.

Where does banking go from here?

In some ways, the transformation in banking began much earlier than this Spring, thanks to the shock of the Financial Crisis.

“There’s been a tectonic shift in the financial sector since the 2008 global financial crisis, with banks gradually losing their dominance amid new regulations, technologies and competitors,” BlackRock wrote.

Regulators now keep banks on a shorter leash, to prevent the kind of thing that happened 15 years ago.

Meanwhile, the fintech industry and cryptocurrencies have zoomed ahead, changing how people conceive of and trade with their money, at the same time many banks have struggled with digital transformation.

In BlackRock’s view, this year-long decline is only going to keep going in one direction.

“Longer term, we see risks to incumbent banks. We think regulation, more concentration, competition for deposits and disintermediation of payments all have the potential to reshape the future of banking and finance,” they concluded.