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Retail sweep programs and bank reserves, 1994-1999

  • Richard G. Anderson
  • Robert H. Rasche

Since January 1994, the Federal Reserve Board has permitted depository institutions in the United States to implement so-called “retail sweep programs.” The essence of these programs is computer software that dynamically reclassifies customer deposits from transaction accounts, which are subject to statutory reserve-requirement ratios as high as 10 percent, to money market deposit accounts, which have a zero ratio. Through the use of such software, hundreds of banks have sharply reduced the amount of their required reserves. In many cases, this new lower requirement places no constraint on the bank because it is less than the amount of reserves (vault cash and deposits at the Federal Reserve) that the bank requires for its ordinary day-to-day business. In the terminology introduced by Anderson and Rasche (1996b), such deposit-sweeping activity has allowed these banks to become “economically nonbound” and has reduced to zero the economic burden (“tax”) due to statutory reserve requirements. In this analysis, we examine a large panel of U.S. banks and develop quantitative estimates of the impact of sweep software programs on the demand for bank reserves.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2001)
Issue (Month): Jan ()
Pages: 51-72

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Handle: RePEc:fip:fedlrv:y:2001:i:jan:p:51-72:n:v.83no.1
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  1. Paul Bennett & Spence Hilton, 1997. "Falling reserve balances and the federal funds rate," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 3(May).
  2. Furfine, Craig H., 2000. "Interbank payments and the daily federal funds rate," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 535-553, October.
  3. Kohn, Meir, 2003. "Financial Institutions and Markets," OUP Catalogue, Oxford University Press, edition 2, number 9780195134728, March.
  4. Bennett T. McCallum & Monica Hargraves, 1994. "A Monetary Impulse Measure for Medium-Term Policy Analysis," IMF Working Papers 94/146, International Monetary Fund.
  5. William R. Emmons, 1997. "Recent developments in wholesale payments systems," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 23-43.
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