Sweep deposits from brokerage firms to banks vary inversely with the stock market. When the stock market declines, retail investors reduce risk and sell stocks, with the proceeds typically swept out of brokerage firms and into banks. This result holds for monthly data obtained from a large brokerage firm with affiliated banks and for estimated aggregate quarterly data for sweep deposits across banks. Overall, sweep deposits are a primary driver backing the inverse relation between total bank deposits and the stock market, and are not destabilizing, but instead stabilizing for banks as households reduce risk by converting stock to cash during periods of high stress. They also play a role in the bank lending channel by providing additional funds for loan commitments or credit lines during stressful periods. Absent the recent innovation of sweep deposits swept from brokerage firms to banks, client cash would reside on the balance sheets of brokerage firms and invested in short-dated Treasuries and comparable low-risk securities. Lastly, we find support for the deposits channel in monetary policy, namely that sweep deposits of brokerage clients have a high elasticity to the Federal Funds rate, holding the stock market constant.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.