FRBSF Economic Letter

2001-02 | January 26, 2001

Retail Sweeps and Reserves

John Krainer

Western Banking Quarterly is a review of banking developments in the Twelfth Federal Reserve District, and includes FRBSF’s Regional Banking Tables. It is normally published in the Economic Letter on the fourth Friday of January, April, July, and October.

Since 1994, depository institutions have been able to lower required reserves without affecting customer liquidity by periodically reclassifying balances from retail transactions deposits into savings accounts. This practice, known as “sweeping,” has grown rapidly in the last six years, and, as a result, reserve requirements as a percentage of total liquid deposits have fallen dramatically.

This Economic Letter investigates the extent to which retail sweep accounts are being used in the banking sector. We also investigate how depository institutions have responded to the effective drop in required reserves realized by sweeping.

Reserve requirements

The Federal Reserve requires depository institutions (DIs) to hold reserves against transactions deposits, such as checking accounts. Currently, there are no requirements for net transactions balances below $5.5 million, and DIs must hold 3% reserves against balances between $5.5 million and $42.8 million, and 10% against the remaining balances.

Depository institutions hold reserves in two forms: reserve balances (deposits) at the Federal Reserve that earn no interest and vault cash (vault cash includes the sum of all cash in central vaults, branches, ATMs, and cash in transit with an armored carrier). Even without reserve requirements, DIs would hold some reserves and vault cash to support the transactions and liquidity services they provide to their customers. But for many DIs, reserve requirements leave them holding more reserves than they need for business purposes. For those DIs, reserve requirements are like a tax, which they have incentives to reduce.

Retail sweeps

One way to reduce the reserve requirement tax is to use “sweep” arrangements (for more detail on sweeps, see Edwards 1997). With sweeps, balances in reservable accounts are periodically reclassified, or “swept,” into money market deposit accounts, which are nonreservable accounts. DIs have used sweeps for wholesale deposits for some time. Only since 1994, however, have DIs been permitted to sweep retail deposits. Since then, the amount of retail deposits swept has grown significantly. By December 1999, DIs were sweeping an estimated $370 billion (nearly 40% of total liquid deposits). As a result of using sweeps, aggregate transactions deposits fell from $810 billion in January 1994 to $620 billion by December 1999.

Large institutions (assets greater than $10 billion) account for much of the sweeping. By the fourth quarter of 1998, nearly 70% of the large institutions in a sample of 5,609 institutions in continuous operation since 1994 had implemented sweep programs. Institutions that are medium-sized (assets less than $10 billion and greater than $1 billion) and small (assets less than $1 billion) adopted sweep programs at much lower rates—56% and 8%, respectively.

Impact on reserves

Sweep arrangements have allowed DIs to maintain the liquidity of their customers’ accounts while lowering reservable deposit balances and thus effectively reducing their reserve requirements. Given the reductions in reserve requirements, it is interesting to ask whether DIs have changed the way they meet reserve requirements. In other words, are DIs dividing reserves in the same proportions between balances at the Federal Reserve and balances in the form of vault cash?

In meeting reserve requirements, one advantage of holding balances at the Federal Reserve is that excess reserves are highly liquid, since they can be traded in the federal funds market. Vault cash holdings, in contrast, are considerably less liquid than reserve balances, as the cost of transportation effectively limits short-term trading. However, vault cash supports the provision of liquidity services by DIs, and, therefore, additional vault cash can have some value to a DI.

Figure 1 shows aggregate trends in the disposition of reserves and vault cash in the sample as DIs reduced their reserve requirements through retail sweeps. The ratio of vault cash to liquid deposits remained relatively flat, while the ratio of reserve balances at the Federal Reserve to liquid deposits (thin solid line) fell sharply. On the surface, this suggests that, for the most part, vault cash holdings tended to reflect the business needs of DIs and that the reserves in excess of business needs were less costly to hold as reserve balances at the Fed.

Figures 2 and 3 break the sample down by separating the large DIs into those that do and do not use retail sweeps as of 1999. It is clear from Figure 2 that the relative reduction in reserve balances at the Federal Reserve was much more pronounced for the DIs using sweeps. As of the second quarter of 1999, large sweeping DIs held reserve balances equal to approximately 1.5% of total liquid deposits (adjusted transactions deposits). This supports the view that the adoption of sweeps led to the adjustment to reserve balances.

Large DIs adopting sweeps also may have responded to the lower effective reserve requirement by adjusting vault cash by more than suggested by Figure 1. In Figure 3, the ratio of vault cash to liquid deposits has fallen for the group of large DIs that adopted retail sweeps. The decline in the ratio of the sweeping DIs is even more notable when compared to the pronounced upward trend in the vault cash ratios for the large non-sweeping DIs. Interestingly, while large sweeping institutions appear to have managed declines in vault cash ratios, they remain relatively more cash-intensive than their non-sweeping competitors. Nevertheless, the sum of reserve balances at the Federal Reserve and vault cash relative to transactions deposits (adjusted for sweeps) at the large sweeping DIs has dropped below the comparable ratio for the non-sweeping DIs.


Retail sweeps afford DIs the opportunity to reduce the “tax” from reserve requirements without reducing the liquidity of their customers’ accounts. The DIs adopting retail sweeps in recent years, as a group, have been very successful in reducing the cost of reserve requirements. Based on the adjustment made to date, it appears that DIs generally found it less costly on the margin to meet binding reserve requirements by holding balances at the Federal Reserve, rather than in the form of additional vault cash. This may be because balances held at the Federal Reserve can be managed more effectively. Nevertheless, the large DIs that engage in retail sweeps also appear to have tightened the management of vault cash.

John Krainer


Edwards, Cheryl L. 1997. “Open Market Operations in the 1990s.” Federal Reserve Bulletin (November) pp. 859-874.

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