The increasing use of sweep accounts and their impact on reserve requirements
Sweep accounts have been in existence since the 1970' s but have grown dramatically since 1995. Sweep accounts provide a way for banks to pay interest on the funds in checking accounts even though paying interest on checking accounts is prohibited. In the 1970's, banks used sweep accounts primarily to bypass regulations prohibiting payments of interest on demand deposit accounts. However, today banks are using sweep accounts to lower their reserve requirements. The dramatic increase in the amount of funds being swept has lead to a significant reduction in required reserve balances. Required reserve balances are one of the tools used by the _Federal Reserve to conduct monetary policy. This reduction in required reserve balances has made it more difficult for the Federal Reserve to forecast the demand for funds which could lead to difficulties in the implementation of monetary policy. In this study, I show that the rapid increase in the number of sweep accounts and the amount of the funds being swept, corresponds with a steady decrease in required reserves being held by banks However, the anticipated increase in federal funds rate volatility does not occur. I show that after correcting for the unusual events of 2001, Federal funds rate volatility has actually decreased. I attribute this result to banks' increased use of clearing balances, a return to a lagged accounting system, and effective Federal Reserve open market operations.
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Byrd, Anthony K.
Bachelor of Science (B.S.)
College of Business Administration
Business Administration -- Dissertations, Academic;Dissertations, Academic -- Business Administration
Length of Campus-only Access
Honors in the Major Thesis
LaBine, Natalie, "The increasing use of sweep accounts and their impact on reserve requirements" (2002). HIM 1990-2015. 317.