Money Is Leaving Banks. Here's Where It's Going Instead

There have been a lot of increases to the federal funds rate over the past year, as the Federal Reserve tries to stem inflation. This move has had a lot of interesting side effects, not the least of which has been a sharp decline in the amount of money kept in banks.

According to CNBC's Steve Liesman, money has been leaving the banks in the hundreds of billions. Indeed, Liesman says as much as $600 billion has left the top 25 banks, and $150 billion has left the smaller banks.

So where's all that money going? Unfortunately, not into the economy.

Money markets and Treasuries are the big winners

Liesman says that much of the moving money has found its way into money market accounts, which have seen an increase to the tune of half a trillion dollars. A lot has also been put into government Treasuries -- both directly, and indirectly, as money markets like to keep funds in short-term Treasuries.

Interest rates have been a strong driver of this behavior. Treasury rates have been competitively high for more than a year now, and even regular folks have been getting in on the action with a big revival of I bonds (though that particular love affair may be cooling down).

In the end, it all comes down to where the best return can be found. And despite the recent rise of high-yield savings accounts, right now, the best rates aren't at the big banks.

Big banks don't need your deposits

Part of this is an active choice by banks, according to Liesman. Banks have better profit margins when they're not paying out high rates on deposits.

Another part of it all? The largest banks simply don't need the extra deposits in the first place.

The money we deposit into banks is, in part, what banks use to finance the loans they offer. The more deposits the bank has, the more loans it can provide.

Since many banks make a lot of their profit on the interest from those loans, you'd think they'd want to offer as many as they can. But there's a risk-reward balance that needs to be carefully maintained, especially in times of economic uncertainty. (If the loans are defaulted on, for instance, all that lovely interest income disappears.)

So, rather than increase rates on deposit accounts to draw in new money, banks have gone the other way: They're tightening their credit requirements. Stricter credit requirements means fewer loans, but it also means what loans are offered will be lower risk.

The real impacts have yet to be felt

When lenders tighten credit standards, the impacts can be felt throughout the economy. And while a lot of money has already shifted, there is still a lot in motion.

Liesman says the real impacts have yet to be felt. Some experts expect we'll see a drag on GDP growth later this year or early next year as a result of what's happening now.

Some amount of that impact will depend on what the Fed does throughout the summer. We may (finally) be at the point where rates stop increasing -- or, at least, stop increasing at such a high rate -- which could help things settle.