Investors are ditching traditional bank accounts for higher-yielding money market funds, causing a big headache for major banks like Wells Fargo, Bank of America, and Citi.
The Great Money Market Migration
People are tired of their savings accounts earning next to nothing. They’re now pouring their money into money market funds, which are currently offering rates of 5% or more – that’s five times what you’d get at a regular bank! This shift has led to a record $6.15 trillion in money market funds, a whopping $2.45 trillion increase since 2020.
Banks Fight Back, But Profits Take a Hit
To stay competitive, banks are raising their interest rates, but it’s hurting their bottom line. Wells Fargo, Citigroup, and Bank of America all saw a drop in their profits for the second quarter of 2024, directly linked to the higher interest they’re paying out.
Trading to the Rescue
The good news for these banks is that they’re making more money from investment banking and trading. This is helping to offset the losses from lower interest income.
The Fed’s Role
The Federal Reserve has been aggressively raising interest rates to combat inflation. This has created a favorable environment for money market funds, which are able to offer higher returns. The Fed’s benchmark interest rate is now at its highest level in two decades.
