Savers flee banks for money funds

The banking turmoil of March 2023 unleashed the fastest migration of retail and corporate capital in modern financial history. As fears over regional bank solvency spread and Silicon Valley Bank’s uninsured depositors scrambled for cover, assets in US money market funds (MMFs) exploded past $5.1 trillion to an all-time record, absorbing more than $300 billion in a matter of weeks. Financial pundits framed this capital flight as a panicked flight to safety. But institutional portfolio managers recognize that safety was merely the catalyst that accelerated an overdue economic awakening: depositors are finally abandoning low-yielding commercial bank deposits in search of market-clearing yield.

For more than twelve months, commercial banks exploited the lethargy of their customers, keeping retail savings deposit rates pinned near 0.2 per cent while the Federal Reserve pushed benchmark policy rates above 4.5 per cent.

The Yield Arbitrage

This massive spread allowed commercial banks to earn windfall net interest margins. But the banking crisis shattered that retail apathy. Once depositors realized their deposits were not only uncompensated but potentially uninsured, they discovered money market funds offering 4.5 to 4.8 per cent backed by short-dated sovereign paper and the Fed’s Reverse Repo Facility.

The convenience of a commercial bank checking account ceased to justify a 450-basis-point yield penalty. Corporate treasurers and retail savers staged a rational, synchronized migration toward risk-free yield.

The Permanent Disintermediation

This flow represents a structural disintermediation of the traditional commercial banking system. Money that enters a government money market fund is recycled into Treasury bills or parked at the Fed’s ON RRP; it does not return to regional banks to fund commercial mortgages or small business payroll loans.

To stem the bleeding, commercial banks must aggressively bid up deposit rates, destroying their own net interest margins, or allow their balance sheets to shrink. The surge into money market funds is not a temporary flight to safety that will reverse once panic subsides; it is a permanent structural revolt against zero-interest deposit exploitation that will starve regional banks of low-cost funding for the remainder of the credit cycle.