Hundreds of billions of dollars leave US banks
US banks have seen a significant outflow of deposits this year as consumers and institutions turn to money market funds in search of higher interest rates. According to data from the Federal Reserve Economic Data (FRED), deposits in all US commercial banks have dropped from $17.736 trillion at the beginning of the year to $17.339 trillion as of November 22nd, a decline of $397 billion.
Rise in money market funds
This decrease in deposits coincides with a surge in money market funds as investors seek stable returns on their cash. The Investment Company Institute (ICI) reports that a total of $5.836 trillion has flowed into money market funds as of November 29th, with retail investors accounting for $2.245 trillion and institutional investors responsible for $3.590 trillion.
Higher interest rates attract investors
Money market funds offer higher interest rates compared to the national average annual percentage yield (APY) of 0.56%. According to Forbes, these funds can pay as high as 5.13% in interest, with yields closely linked to the federal funds rate, which currently stands at 5.33%.
Hot Take: Capital flight from US banks signals changing investment preferences
The significant outflow of deposits from US banks and the corresponding increase in money market funds highlight a shift in investment preferences. With money market funds offering higher interest rates and stable returns, investors are choosing to move their capital away from traditional banking institutions. This trend could have implications for the banking sector, as it may lead to reduced liquidity and lending capacity. As interest rates remain a key factor in investment decisions, banks may need to adapt their strategies to attract deposits and retain customers.
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