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From an opinion piece in the Washington Post:

"Since the Federal Reserve began to raise rates about a year ago, deposits leaving the banking sector have totaled nearly $1 trillion".

Why would bank deposits go down while interest rates are going up? I thought the higher interest rates would attract more deposits.

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    $\begingroup$ note that many banks are not raising their deposit rates to match money market rates, therefore money flows out of those banks to the money market. It doesn't explain aggregate effects, though, since that money usually flows into another bank (e.g. the bank used by the manager of the money market fund, and then the banks used by the vendors of the components of the fund) and makes a deposit there $\endgroup$
    – user253751
    Apr 17, 2023 at 9:34

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It's all a consequence of our much misunderstood monetary system in which bank loans create new money and the repayment of (the principal of) those loans destroys money.

Deposits mainly correspond to what the banks owe to its customers, so they can not really "leave" the banking sector. The reason there are less deposits is that they expire when loans are repaid. If amount of new loans being created each day is less than the amount of existing loans being repaid then the amount of deposits in existence will fall. A higher interest rate reduces lending (because it discourages borrowing) and so makes this scenario more likely.

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  • $\begingroup$ This sentence in the article may be germane: "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money." I guess these are the deposits that are going down. $\endgroup$
    – T Scherer
    Apr 16, 2023 at 17:07
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    $\begingroup$ "A higher interest rate discourages lending" I think it should be borrowing. $\endgroup$
    – user71659
    Apr 16, 2023 at 23:35
  • $\begingroup$ Thanks. Now corrected. $\endgroup$
    – Mick
    Apr 17, 2023 at 6:12
  • $\begingroup$ @Mick: It's got nothing to do with fractional reserve banking. In fact, there hasn't been a reserve requirement in the US for a few years now. And the paper you refer to comes from an institution where there hasn't been any for decades. They also make the point that how loans and deposits are created has little to do with fractional reserves. $\endgroup$
    – BrsG
    Apr 17, 2023 at 15:14
  • $\begingroup$ @BrsG: I am fully aware there is no reserve requirement in many countries... but that does not prevent the monetary system being referred to as "fractional reserve banking"... after all, banks do still have reserves and the amount of them will be a fraction of their deposits. $\endgroup$
    – Mick
    Apr 17, 2023 at 16:44

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