At the same time, demand for shares has risen sharply. The nation's money supply has been growing at a 6.4 percent clip for most of the past decade, yet the economy as measured by nominal gross domestic product has been growing at slightly less than 3 percent annually in the same period.
Thus, excess funds have been building in the banking system. Bank deposits have grown by 7.3 percent per year in the past decade, according to the Federal Reserve. However, since the economy is growing relatively slowly, the banks have failed to put a large portion of their new deposits to work.
Consider this. At the end of 2017, banks had $13.2 trillion in deposits but only $9.6 trillion in loans. In fact, because the money supply kept growing and the economy did not keep pace, deposits grew by $5 trillion from 2007 to 2017. Yet, loans only grew by $1.9 trillion. So, at present, banks now have $3.66 trillion more in deposits than in loans. This is the biggest gap ever in these figures. To think of this another way, it is 7.6 times greater than this gap was in 2007, when it was only $476 billion.
Since the banks cannot lend all of these deposits, and because there are high capital costs to keeping them, banks are paying below-market rates for the funds. My estimate, based on numbers from the Federal Deposit Insurance Corporation, is that banks are paying between 50 and 60 basis points for funds today when the effective Federal Funds rate is 1.42 percent.