This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Many people are moving money out of banks as they look for better returns elsewhere. Read on to find out what that could mean for the economy.
There have been a lot of increases to the federal funds rate over the past year, as the Federal Reserve tries to stem inflation. This move has had a lot of interesting side effects, not the least of which has been a sharp decline in the amount of money kept in banks.
According to CNBC’s Steve Liesman, money has been leaving the banks in the hundreds of billions. Indeed, Liesman says as much as $600 billion has left the top 25 banks, and $150 billion has left the smaller banks.
Save: This credit card has one of the longest 0% intro APR periods around
More: Save while you pay off debt with one of these top-rated balance transfer credit cards
So where’s all that money going? Unfortunately, not into the economy.
Money markets and Treasuries are the big winners
Liesman says that much of the moving money has found its way into money market accounts, which have seen an increase to the tune of half a trillion dollars. A lot has also been put into government Treasuries — both directly, and indirectly, as money markets like to keep funds in short-term Treasuries.
Interest rates have been a strong driver of this behavior. Treasury rates have been competitively high for more than a year now, and even regular folks have been getting in on the action with a big revival of I bonds (though that particular love affair may be cooling down).
In the end, it all comes down to where the best return can be found. And despite the recent rise of high-yield savings accounts, right now, the best rates aren’t at the big banks.
Big banks don’t need your deposits
Part of this is an active choice by banks, according to Liesman. Banks have better profit margins when they’re not paying out high rates on deposits.
Another part of it all? The largest banks simply don’t need the extra deposits in the first place.
The money we deposit into banks is, in part, what banks use to finance the loans they offer. The more deposits the bank has, the more loans it can provide.
Since many banks make a lot of their profit on the interest from those loans, you’d think they’d want to offer as many as they can. But there’s a risk-reward balance that needs to be carefully maintained, especially in times of economic uncertainty. (If the loans are defaulted on, for instance, all that lovely interest income disappears.)
So, rather than increase rates on deposit accounts to draw in new money, banks have gone the other way: They’re tightening their credit requirements. Stricter credit requirements means fewer loans, but it also means what loans are offered will be lower risk.
The real impacts have yet to be felt
When lenders tighten credit standards, the impacts can be felt throughout the economy. And while a lot of money has already shifted, there is still a lot in motion.
Liesman says the real impacts have yet to be felt. Some experts expect we’ll see a drag on GDP growth later this year or early next year as a result of what’s happening now.
Some amount of that impact will depend on what the Fed does throughout the summer. We may (finally) be at the point where rates stop increasing — or, at least, stop increasing at such a high rate — which could help things settle.
These savings accounts are FDIC insured and could earn you 12x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.