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

See all articles by James R. Barth

James R. Barth

Auburn University; Milken Institute

Mark L. Mitchell

University of Chicago - Booth School of Business; AQR Arbitrage, LLC

Yanfei Sun

Toronto Metropolitan University

Date Written: January 10, 2023

Abstract

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

Barth, James R. and Mitchell, Mark L. and Sun, Yanfei, Runs to Bank: The Role of Sweep Banking Deposits During Market Downturns (January 10, 2023). Critical Finance Review, Available at SSRN: https://ssrn.com/abstract=3809322 or http://dx.doi.org/10.2139/ssrn.3809322

James R. Barth

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States
334-844-2469 (Phone)
334-844-4960 (Fax)

Milken Institute ( email )

1250 Fourth Street
Santa Monica, CA 90401
United States

Mark L. Mitchell (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

AQR Arbitrage, LLC ( email )

One Greenwich Plaza
4th Floor
Greenwich, CT 06830
United States
(203) 742-3001 (Phone)

Yanfei Sun

Toronto Metropolitan University ( email )

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