03.30.2023 – Money Fund Surge & Debt Scourge

As markets continue to process future implications of the SVB/SBNY bank failures and Credit Suisse rescue earlier this month, one immediate effect has been a surge in money market fund balances given heightened concerns over the safety of traditional bank deposits. Indeed, nearly $300 billion have poured into money market funds during March, levels not seen since the early months of the pandemic, bringing total assets in these investment pools to an all-time high of $5.1 trillion. Driven by higher yields and investor diversification away from traditional bank deposits, particularly for balances above the $250,000 FDIC insurance ceiling, this disintermediation has primarily afflicted the regional/community banking sector, where deposits have fallen in the aggregate and fueled concerns for a wider credit contraction that could hasten a deeper, more protracted economic downturn later this year. In addition to money market funds, this disintermediation away from deposits at smaller banks has also benefited larger, money center banks, with the former shedding nearly $110 billion in deposits, whilst the largest 25 banks have seen net inflows of $120 billion through the middle of this month, according to Federal Reserve data.

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