Retail Sweep Programs and Bank Reserves

Since January 1994, the Federal Reserve Board has permitted depository institutions in the United States to implement so-called "retail sweep programs." The essence of these programs is computer software that dynamically reclassifies customer deposits from transaction accounts, which are subject to statutory reserve-requirement ratios as high as 10 percent, to money market deposit accounts, which have a zero ratio. Through the use of such software, hundreds of banks have sharply reduced the amount of their required reserves. In many cases, this new lower requirement places no constraint on the bank because it is less than the amount of reserves (vault cash and deposits at the Federal Reserve) that the bank requires for its ordinary day-to-day business. In the terminology introduced by the authors in a previous article (see MEASURING THE ADJUSTED MONETARY BASE IN AN ERA OF FINANCIAL CHANGE [ICPSR 1169]), such deposit-sweeping activity has allowed these banks to become "economically nonbound" and has reduced to zero the economic burden ("tax") due to statutory reserve requirements. In this analysis, the authors examine a large panel of United States banks and develop quantitative estimates of the impact of sweep software programs on the demand for bank reserves.