Hoping to capture a piece of the $192 billion commercial bank sweep market, the year-old partnership of American Century Investments and J. P. Morgan has introduced a same-day bank sweep program.
The new program allows banks' corporate clients to roll excess, otherwise idle end-of-day assets out of demand deposit bank accounts and into any of four institutional J.P. Morgan money funds. They include the J.P. Morgan Federal Money Market Fund, J.P. Morgan Prime Money Market Fund, J.P. Morgan Tax Exempt Money Market Fund and the J.P. Morgan Treasury Money Market Fund. The funds now have a total of $12 billion under management.
J.P. Morgan's money funds were chosen as the sweep vehicles because of their appeal to institutional investors. The firms also hope to capitalize on J.P Morgan's solid reputation as a competent investment bank well equipped to handle cash management, said Robert White, J.P. Morgan product manager.
Bank sweep accounts have become a popular new means for money funds to build assets and the J.P. Morgan/American Century program marks the first combined venture into the bank channel for the two firms. In July, 1997, J.P. Morgan of New York bought a 45 percent stake in the Kansas City-based mutual fund sponsor which manages the combined American Century and Benham Funds and over $70 billion for individual and institutional investors. Since then, the firms have spent considerable time and energy combining their operations to serve the various sales channels.
The bank sweep program is aimed at banks with less than $6 billion in assets, according to Dave Larrabee, vice president and director, bank and trust sales at American Century. Larrabee estimates that market includes some 200 banks which do not now have their own proprietary money funds in which to sweep corporate clients' cash. Most larger banks have internal funds. But many smaller banks have chosen not to launch funds. A number of small or mid level banks whose proprietary funds are not large enough to attain economies of scale are rethinking their decision to sponsor money funds, said Peter Crane, managing editor with IBC Financial Data.
The program will narrow disparities between the capabilities of larger and smaller banks, says Larrabee. In addition, the J.P. Morgan/American Century bank sweep program offers automatic same-day sweeps, he said. Though larger banks have been offering banking clients sweep accounts for years, some are not automatic and others do not sweep daily, he said.
Industry figures show that bank sweep accounts and money funds are becoming very popular. According to the 1998 Commercial Banking Sweep Account Survey conducted by Treasury Strategies of Chicago, overall assets in sweep accounts have grown at a 44 percent compounded annual rate since 1991. They have grown 106 percent in the last two years alone.
In fact, money fund sweep assets have surpassed dollars swept into depository and trust accounts and offshore affiliates of U.S. banks. Though money fund sweep assets still lag behind the more than $104 billion swept into overnight instruments in 1997, such as repurchase agreements, commercial paper, master notes and Fed Funds, money funds are gaining. Money funds have increased their market share of sweep assets, and now account for 21 percent of the market, up from 11 percent in 1991, said the report.
There are many reasons banks are adopting sweep programs. For one, banks can move sweep assets off their balance sheets which means they do not have to pay deposit insurance on the dollars held in money funds, said IBC's Crane. Furthermore, banks do not have to maintain extra cash reserves on these assets, he said.
More importantly, banks, which have for years complained of losing assets to money funds, have found a way to "recapture" those assets, and the attention of business customers, said Crane. Banking regulations prohibit banks from paying interest on business checking accounts.