Retail Sweep Programs and Bank Reserves , 1994 - 1999

In January 1994, the Federal Reserve Board permitted a commercial bank to begin using a new type of computer software that dynamically reclassifies balances in its customer accounts from transaction deposits to a type of personal-saving deposit, the money market deposit account (MMDA).1 This reclassification reduces the bank’s statutory required reserves while leaving unchanged its customers’ perceived holdings of transaction deposits. The use of deposit-sweeping software spread slowly between January 1994 and April 1995, but rapidly thereafter. Estimates of the amounts of transaction deposits reclassified as MMDAs at all U.S. depository institutions, prepared by the Board of Governors’ staff, are shown in Figure 1.2 By late 1999, the amount was approximately $372 billion. In contrast, the aggregate amount of transaction deposits (demand plus other checkable deposits) in the published M1 monetary aggregate, as of December 1999, was $599.2 billion. In this analysis, we interpret the effects of deposit-sweeping software on bank balance sheets to be economically equivalent to a reduction in statutory reserve-requirement ratios. We seek to measure the amount by which such depositsweeping activity has reduced bank reserves (vault cash and deposits at Federal Reserve Banks). Currently, transaction deposits are subject to a 10 percent statutory reserve-requirement ratio on amounts over the low-reserve tranche ($44.3 million during 2000, $42.8 million during 2001), whereas personal-saving accounts, including MMDAs, are subject to a zero ratio.3 To be useful in policy analysis and empirical studies, aggregate quantity data on bank reserves must be adjusted for the effects of changes in statutory reserve requirements on the quantity of reserves held by banks.4 In the past, such adjustments were straightforward because changes in statutory reserve requirements applied simultaneously and uniformly to groups of depository FEDERAL RESERVE BANK OF ST. LOUIS