Not only are banks having to set aside extra capital that can’t be used for lending, they are also facing a dwindling deposit base. Investors are increasingly taking cash away from banks and putting it into money market funds. A major reason for this is that the banks pay investors below what money market funds can get using the Fed’s Reverse Repo facility. As the chart below shows, the Reverse Repo usage exploded higher last year as, thanks to the Fed’s money printing, institutions had nowhere else to put their cash.
