In the war for deposits, banks trounce thrifts, money funds

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One aim of the government’s financial-system bailout plan is to make strong banks stronger while forcing weaker institutions to sell themselves or risk liquidation.

Individual savers are abetting this strategy: Since Sept. 1, they have shifted significant sums into banks in general, and out of thrift institutions, which tend to be smaller and therefore more likely to be perceived as vulnerable to financial trouble.

Data from the Federal Reserve show that savings deposits at commercial banks jumped $186 billion from Sept. 1 through Oct. 20, to $3.29 trillion.

In the same period, thrifts lost a net $109 billion in savings deposits, to $788 billion.

Savings deposits include money market deposit accounts, which compete directly with money market mutual funds.

The trend has been the same with certificates of deposit. Commercial banks gained a net $113 billion in small CDs (those under $100,000) from Sept. 1 to Oct. 20, lifting their total to $978 billion.

Thrifts lost a net $38 billion in small CDs in that period, to $339 billion.

‘These data strengthen the gravitational pull of money moving toward the ‘club,’ those banks that are on the receiving end of money from Uncle Sam,’ says Tony Crescenzi, bond market strategist at Miller, Tabak & Co. in New York.

Another continuing shift: Money market mutual funds used by individual investors have seen cash outflows every day since Oct. 20. Total assets of all retail funds (taxable and tax-free) have fallen $29 billion since then, to $1.445 trillion as of Thursday, according to iMoneyNet Inc.

Although some investors may be worried about money funds’ health (even though the funds now are covered by a temporary federal insurance program), the likelihood of more cuts in short-term interest rates by the Fed means it makes sense for many people to be exiting money funds in favor of locking in yields on bank CDs.