<p>It's all a consequence of our much misunderstood <a href="https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf" rel="nofollow noreferrer">monetary system</a> in which bank loans create new money and the repayment of (the principal of) those loans destroys money.</p>
<p>Deposits mainly correspond to what the banks owe to its customers, so they can not really &quot;leave&quot; 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.</p>

CC BY-SA 4.0
2023-04-16T17:07:04.513Z
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.
TESch
CC BY-SA 4.0
2023-04-16T23:35:04.527Z
"A higher interest rate discourages lending" I think it should be _borrowing_.
user71659
CC BY-SA 4.0
2023-04-17T15:14:15.040Z
@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.
BrsG
CC BY-SA 4.0
2023-04-17T16:44:25.613Z
@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.
Mick
CC BY-SA 4.0
2023-04-17T17:25:15.383Z
My point is the reference to fractional reserve banking doesn't add to your answer. It's all about how loans/deposits are created and destroyed, whether there is such a system or not. See also the very first comment by T Scherer.
BrsG
CC BY-SA 4.0
2023-04-18T07:40:26.613Z
@BrsG: answer edited to make it less controversial.
Mick
CC BY-SA 4.0
2023-04-16T16:18:00.717Z
2023-04-18T07:36:32.923Z
2023-04-18T07:36:32.923Z
Mick
<p>From an <a href="https://www.washingtonpost.com/opinions/2023/04/14/banks-lending-down-inflation/" rel="nofollow noreferrer">opinion piece</a> in the Washington Post:</p>
<p>&quot;Since the Federal Reserve began to raise rates about a year ago, deposits leaving the banking sector have totaled nearly $1 trillion&quot;.</p>
<p>Why would bank deposits go down while interest rates are going up? I thought the higher interest rates would attract more deposits.</p>

<interest-rate><banking>
Why have bank deposits gone down with rising interest rates?
TESch
# Why have bank deposits gone down with rising interest rates?

(Asked by: username_0 on 2023-04-16)

From an [opinion piece](https://www.washingtonpost.com/opinions/2023/04/14/banks-lending-down-inflation/) 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.

**Tags:** interest-rate, banking


---

## 1 answers

### Answer by username_1 on 2023-04-16. Score: 3 | Accepted answer

It's all a consequence of our much misunderstood [monetary system](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf) 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.

> **Comments:**
> **username_0**: 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.  
> **username_2**: "A higher interest rate discourages lending" I think it should be _borrowing_.  
> **username_3**: @username_1: 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.  
> **username_1**: @username_3: 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.  
> **username_3**: My point is the reference to fractional reserve banking doesn't add to your answer. It's all about how loans/deposits are created and destroyed, whether there is such a system or not. See also the very first comment by T Scherer.  
> **username_1**: @username_3: answer edited to make it less controversial.  

---

