American Banker: Place a growth limit on the Fed’s reverse-repo facility

Bank depositors are questioning the safety of their deposits following the sudden failures of Silicon Valley Bank, First Republic Bank and others. Those doubts have accelerated withdrawals of deposits from banks. However, bank deposits have been shrinking for the last year. It is usual for bank deposits to be withdrawn whenever the Fed raises interest rates. When the Fed raises rates, banks pay depositors far less than what they can earn at money market mutual funds and in similar investments, causing deposits to exit the banking system. It is a feature, not a bug, of the Fed’s raising rates and has been characterized as “the deposits channel of monetary policy.”

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