ABOUT SWEEP ACCOUNTS
Overview
What is a sweep account designed to provide?
A sweep account is designed to give bank customers the opportunity to invest excess funds from their commercial demand deposit account (DDA) into an interest-bearing account -- since federal regulations prohibit interest payments on commercial DDA’s and limit eligibility for NOW accounts. With sweep accounts, corporate customers that are ineligible for NOW accounts continue to make their deposits and write checks from their DDA (as they always have), but any balances above the “target balance” for that account are transferred or “swept” automatically into a separate account that pays interest.
For years, sweep accounts were considered a novelty, not a necessity. Today, however, sweep accounts are not only highly desirable, but often required by banks’ most valued commercial customers. But sweep accounts are not without regulatory limitations and requirements; if the interest-bearing account is a traditional savings or money market account, Regulation D limits the number of transfers and withdrawals to a total of six per calendar month or statement cycles. And because most DDA’s owned by corporations typically have daily activity, programs utilizing conventional savings or money market accounts can’t compete with those programs that can provide automatic transfers as often as daily.
Despite those challenges, the community bank must either find a way to offer a sweep account program or watch those profitable corporate accounts seek out and move their excess funds to larger regional banks or brokerage firms.
There are essentially two types of programs that allow banks to offer daily sweeping
for customers:
1) Partner with Third-Party Money Market Vendors -- With this program, the community bank is simply a conduit for the activities of the money market fund. Money in each customer’s demand deposit in excess of the target balance is wired out of the bank. The money market fund receives the money, earns the spread, and pays the community bank a small fee -- usually 25 to 35 basis points for the opportunity to use the bank’s customers’ funds. For example: if a bank sweeps $1 million off-ledger daily, they will only make $2,500-$3,500 for becoming a conduit for the third-party money market fund.
2) Establish an In-House Sweep Program Utilizing Repurchase Agreements (“Repos”) -- A repo is a contract between the purchaser (the bank customer) and the bank, and it constitutes short-term debt obligations of the bank secured by securities which are direct obligations of, or are guaranteed as to principal and interest by, the United States or one of its agencies. With this approach, repos earn interest rates determined by the community bank similar to bank deposit liabilities. The interest rate paid on the repos can be changed as often as daily, and even can be tiered to pay more interest to higher daily balances. Such flexible decisions are controlled by the community bank, not by third parties.
- Control and flexibility on the program and rates
- Profitability to the bank
- Customer retention and loyalty
- Regulatory compliance
- Ease of administration