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America’s banks are missing hundreds of billions of dollars

Deposits in US banks have fallen despite the failure of Silicon Valley Bank. Money-market funds and the Federal Reserve’s reverse-repo facility may be contributing to the decline.

  • Deposits in American banks have fallen by half a trillion dollars over the past year, despite the failure of Silicon Valley Bank (SVB) not reducing the aggregate amount of deposits in the banking system.
  • Money-market funds, low-risk investment vehicles that park money in short-term government and corporate debt, saw inflows of $121bn last week as SVB failed.
  • Inflows to money-market funds should shuffle deposits around the banking system, not force them out. But there is one new way in which money-market funds may suck deposits from the banking system: the Federal Reserve’s reverse-repo facility.
  • Use of money-market funds rises along with rates, as returns adjust faster than bank deposits. Indeed, the Fed has raised the rate on overnight-reverse-repo transactions from 0.05% in February 2022 to 4.55%, making it far more alluring than the going rate on bank deposits of 0.4%.
  • Money-market funds could in effect become “narrow banks”: institutions that back consumer deposits with central-bank reserves, rather than higher-return but riskier assets.
America’s banks are missing hundreds of billions of dollars
How the Federal Reserve drained the financial system of deposits | Finance & economics