3 ms·
No it’s not. Sweep accounts reduce systemic risk because your money is at different banks. MMFs are an independent product. Consider SVB. Bank run aside deposi
by ericpauley 3y ago
No it’s not. Sweep accounts reduce systemic risk because your money is at different banks. MMFs are an independent product.
Consider SVB. Bank run aside deposits were poorly diversified and many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios. Unlimited insurance does not solve this problem, except in paying out, which the FDIC ideally would not have to do.
Deposit diversification does solve this problem, and the only reason it’s incentivized for depositors is because of the insurance cap. The overhead of sweeps is quite low and money markets even lower (MMFs with the fed outperform best bank deposit rates even after management fees).
Honestly retail banking is the real dead weight loss. Sweep accounts often offer better rates than the underlying banks give their customers because the sweep accounts have low overhead for the bank and pass on the savings. Same goes for other banking products like CDs: banks offer better rates on the market than to their own customers.
- Scoundreller 3y ago> many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios. Seems like there should be a market for a bank that advertises “no long-duration HTMs unless we hold a duration and interest-matched CD” and “short-dated investments only on checking acct balances”. If that doesn’t exist, it sounds like big depositors were ignorant or quite happy to get some extra interest (or fancier offices/marketing) in exchange for that risk.
- ericpauley 3y agoThis is what MMFs accomplish, and they yield higher than banks accounts.
- Scoundreller 3y agoSorta. The problem is big corps do a lot of transactions in their account and can't predict when that $850k (or $850m) transfer is on the way in as their bank is collapsing. And even debits can't always be predicted, but I doubt big payments are pre-authed like that. Not sure if a bank would be 100% protected if they had a script that checked their balance every minute and sent it to a MMF.