Runs to Bank: The Role of Sweep Banking Deposits During Market Downturns
Critical Finance Review
61 Pages Posted: 22 Mar 2021 Last revised: 18 Jan 2023
Date Written: January 10, 2023
Sweep deposits are a relatively recent and important innovation that allows the seamless transfer of client cash from brokerage firms to bank accounts and vice versa. We find that funds swept from brokerage firms to banks vary inversely with stock market performance. When the stock market declines, retail investors reduce risk and sell stocks, with the proceeds swept out of brokerage firms and into banks. The relation is asymmetric as sweep deposits do not appear to decline in response to positive movements in the stock market. Sweep deposits are the primary driver backing the same asymmetric relation between domestic bank deposits and the stock market. Moreover, sweep deposits provide additional financing stability to banks as households reduce risk by converting stocks to deposits during stress periods, helping to fund drawdowns in lines of credit by firms.
Keywords: banks, sweep deposits, brokered deposits, stock market, bank regulation
JEL Classification: G20, G21, G28
Suggested Citation: Suggested Citation