Why US Banks Are Hemorrhaging Deposits to Money Funds

For well over a decade, “interest-earning savings account” was almost an oxymoron — interest rates offered to depositors were near zero almost everywhere. Then the US Federal Reserve started rapidly increasing rates in early 2022 to fight inflation. US banks raised their deposit rates a little; money market funds (MMFs) raised theirs by much more. What followed was a wave of more than $1 trillion in bank deposit withdrawals, perhaps the biggest, fastest outflow ever, while MMF assets surged by $1.3 trillion. Consumers and businesses who switched saw their interest earnings grow but faced new risks. And bank loans to businesses shrank after the deposit flight hit its peak, raising worries about the impact on the economy.

A kind of mutual fund, in which investors buy a share of a pool of assets. MMFs appeal to businesses and consumers who want a bigger return on their cash but want it to be just as available as a bank deposit. The majority of MMFs are restricted to the very safest investments, such as Treasury bills and other short-term US government securities. Other MMFs, known as prime funds, serve business and institutional investors and focus on municipal bonds and short-term corporate IOUs known as commercial paper.