Mutual Funds:

Impact on Bank Deposits and Credit Availability

GGD-95-230: Published: Sep 22, 1995. Publicly Released: Sep 22, 1995.

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Pursuant to a congressional request, GAO examined whether the movement of funds from bank deposits into mutual funds affects the availability of credit for residential, consumer, or commercial purposes.

GAO found that: (1) the amount of money in mutual funds grew from $994 billion at year-end 1989 to $2,172 billion at year-end 1994, mainly due to an increase of net customer inflows; (2) during the same period, bank deposits declined from $3.55 billion to $3.46 billion; (3) as much as $700 billion of the growth in mutual funds may have come at the expense of bank deposits between 1990 and 1994; (4) the movement of money into mutual funds has resulted partly from the relatively lower interest rates paid on bank deposits, but this should have little effect on the total supply of loanable and investable funds, since mutual funds also lend or invest a major portion of the funds they receive; (5) there was insufficient data on whether the different categories of borrowers were affected by the shift of money from bank deposits to mutual funds; (6) all categories of borrowers have recently increased their access to financing obtained through the securities markets; and (7) flows of deposits out of smaller banks could reduce the availability of finance for small businesses whose primary source of finance is loans from such banks.

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