Summary: From year-end 1980 through year-end 1994, the amount of money in mutual funds rose from $994 billion to $2,172 billion--a rise of nearly $1.2 trillion. Although this increase included some price gains for mutual funds owning stocks and bonds, about 90 percent of the rise stemmed from net customer inflow. In contrast, bank deposits fell to $3,462 billion by the end of 1994--$89 billion less than at year-end 1989. Compelling evidence exists that some portion of the growth in mutual funds came at the expense of bank deposits during this period. The amount was probably less than $700 billion. The movement of money into mutual funds rather than bank deposits has been, at least in part, the result of historically low interest rates paid on bank deposits and could change as those rates increase relative to expected returns on mutual fund investments. However, this movement of money should have little impact on the total supply of loadable and investable funds because both banks and mutual funds generally lends or invests a large potion of the funds they receive. Available data do not show whether the different categories of borrowers--residential, consumer, and business, were affected by the shift of money from bank deposits to mutual funds. Nonetheless, there remains a possibility that the flow of deposits out of smaller banks could reduce the availability of finance for small businesses who depend on loans from such banks.
