I have a feeling that the story is a bit misleading, but not intentionally. What is missing is where that cash is going. My assumption is that much of that cash is simply moving from FDIC insured checking and savings to various money market funds - often within the same institutions.
Inflows to MMF is more than 2x the amount of cash pulled from banks.
I think banks can actually use (hypothecate) money in MMFs more than they can from checking and savings so there might even be the potential for larger banks to profit from such a move.
Hawkin, I do not know how this works so if you could tell me I would appreciate it. Lets say people move their money into MMF’s and then there is a run on the banks. Can the banks use that money to back up their deposits leaving? If they can do that what would stop a regional or smaller bank from doing the same thing?
I can only hypothesize (which is why I emphasized think).
I would assume that since the MMF are now investments, they can be borrowed against on behalf of the bank. They also earn fees (see below). As far as regionals and smaller - not all of them have their brokerage and even if they do, they may not be offering the same rates found with some of the larger firms. Some regionals only offer brokerage services through other affiliated firms.
I just grabbed a random local bank (Huntington) and read the brokerage disclosure. This would relate more to your first query:
Deposits in HNB accounts are financially beneficial to HNB and its affiliates (including HFA). HNB intends to use the funds to support a variety of activities, including, but not limited to, its lending activities. Like other depository institutions, the profitability of HNB is determined in large part by the difference between the interest paid to you and other costs incurred by HNB on bank deposits, and the interest or other income earned on HNB’s loans, investments, and other assets. The deposits obtained through the BDSP (Bank Deposit Sweep Program) provide a stable source of funding for HNB. Borrowing costs incurred to fund HNB’s business activities are significantly reduced by the use of deposits from HFA brokerage customer and the BDSP. HFA receives fees from HNB and credits and benefits from our parent company based on assets swept to HNB. Because of the benefits HNB and HFA receive in connection with the BDSP, we have an incentive to make the BDSP available to you and to encourage you choose it as your cash sweep option and to maintain more of your brokerage account in cash.
What I find fascinating about this is that Huntington seems to admit that they have financial incentive for you to use their lower interest Sweep MMF over any higher interest MMF.
Regarding full-service brokerage accounts, if you select a money market mutual fund as a sweep option for your account, HFA will receive trail fees (such as Rule 12b-1 fees and shareholder service fees) from the money market fund and its Investment Sponsor. These fees vary depending on the fund and share class used and range from 0.00% to 0.25%. We (and our affiliates) generally benefit more when you use the BDSP as your sweep option or invest your assets in other investment options available on our platform. We mitigate these conflicts by disclosing them to you and by not sharing sweep revenue with your Financial Advisor.
On a related note, I also took a look at Merchants Bank of Indiana and they do not appear to offer brokerage services.
So they use them as collateral? Let’s say that there is a run on the bank and the bank fails and is taken into receivership and I have a million dollars in that MMF. Is it possible or likely that I will lose that money? Because I assumed that I was putting money into the good faith of the U.S government but maybe that isn’t true. Am I invested in the good faith of the bank?
Money Market Funds (MMFs) are a conglomerate of financial instruments. Each one is different in it’s makeup.
I posted a few weeks ago about the makeup of some Fidelity MMFs which are composed primarily of Treasury repurchase agreements:
It’s my lack of technical understanding in these instruments that causes me a bit of angina about keeping large positions in MMFs today, so as I have posted previously, have gone into a defensive position with our investments and have locked in some CD ladders all FDIC insured and Treasury i-Bonds.
Some brokerages also sweep cash positions in investment accounts into FDIC covered bank deposits.