Funds have been moving out of banks, particularly small and medium-sized banks. Much has been going into Money Market accounts, while some has moved to larger banks, and some directly into Treasuries. The outflow from banks has been triggered by widespread fears following the SVB and Signature Bank runs and closures. The Financial Times placed the inflows to Money Market funds at $340 billion (graph below.)

"Bank deposits have fallen $363 billion to $17.3 trillion since the beginning of March, Fed data show. Assets in money-market funds have risen $304 billion to a record $5.2 trillion, according to Investment Company Institute data." WSJ 

Beyond the Headline

Money Market accounts pay much higher returns than traditional bank savings accounts. It is curious that it took turmoil in the banking system for people to make this move, as the interest rate differential has been increasing notably over the past year. (This also makes me wonder how much is moving in (and out) of High Yield savings accounts at the non-traditional banks. A Yahoo Finance article suggests these type of savings accounts should be part of your portfolio as they are paying interest rates of 4% and up, but I haven’t found data yet on movements. The Fed (FRED data behind the third graph below) breaks the deposit data between small and large institutions, but no further.)

In last week’s reading list I posted at article from the Finance Buff that suggested there is no need to worry about the lack of FDIC Insurance on those brokerage (money market) accounts. There may not be much to worry about in terms of the safety of your individual account, but the collective trend may be causing some broader concerns. Treasury Secretary Janet Yellen has voiced concerns. She states that there has not been a thorough examination of the financial stability of these money market accounts. Furthermore, the shift of funds out of the banking system might actually threaten the stability of the banking system itself.

• The smaller banks that are losing the most in terms of deposits are the ones that can least afford to start paying higher interest rates to lure depositors back.
• Money Market funds are eventually parking these funds outside of the banking system at the Fed, taking advantage of the reverse repurchase facility these days, in addition to the traditional purchases of commercial paper and short term debt. (see box below for explanation.) The effective interest rate paid on these reverse repos is 4.8% today.

• If funds are not going into (smaller) banks, lending from these banks will drop.

The Fed's Reverse Repo Facility

from WSJ

"More than 40% of money-market fund assets are invested in the reverse repo facility, which the Fed created 10 years ago to lift interest rates with a banking sector that had been flooded with reserves. Roughly $2 trillion or more has been parked there since mid-2022. Demand exploded in 2021, when the Fed’s aggressive stimulus during the Covid-19 pandemic sent a wave of deposits into the banking system."

There is debate over whether the Fed should intervene with market forces and lower the interest paid in the repo market to encourage some of these funds back into banks faster, or just let things play out. Overall, bank deposits are still over $17 trillion—the drain has been small in terms of percentage. It just has been more dramatic for smaller banks.

Resources

This Financial Times article was the source of the first two graphs and the gist of this article is summarized in this blog.

The Washington Post was the source of the graph displaying the drop in deposits at small and medium banks.

The WSJ (subscription may be required) was the source of the infographic and information about the Fed’s reverse repo facility.

This Economist (subscription may be required) article covers this topic but goes well beyond (SVB and bank runs, repo and reverse-repo transactions, quantitative easing and the supplementary leverage ratio, and narrow banking.) Relevant for this topic, it is worth reading as it is quite precise about cash flows through money market funds (via banks) and how they operate. (It was from the March 25 print edition.)

Suggested Questions

Based on reading these articles, students can discuss the following questions:

1) From what you have read/know, are you personally concerned about keeping your money in a bank? Why or why not?

2) If you had $500,000 in cash that you needed to keep fairly liquid, where would you put your funds and why? Here are some options to consider:

1. a) I would keep $250,000 in my current bank and mover $250,000 to another bank.
2. b) I would move some/all of it to a high yield savings account.
3. c) I would move some/all of it to a Money Market fund.
4. d) I would purchase some US Treasuries.

3) If you are operating a business, would you answer to the previous question be different?

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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