Money market mutual funds are gradually becoming the vehicle of choice for commercial bank sweep accounts, according to a report released earlier this month by Treasury Strategies, a bank, broker/dealer and mutual fund consulting firm in Chicago.
While all other commercial bank sweep products lost market share in 2000, money market funds gained as bank sweep vehicles for their corporate customers' idle short-term assets, according to the report.
A sweep account is a service that automatically links a commercial bank depository account with an investment account.
Money market mutual funds now account for 37 percent of sweep account vehicles, up from only 10 percent in 1992 and 34 percent in 1999, according to the report. That increase in market share puts them almost on a par with more traditional sweep products such as overnight repurchase agreements and commercial paper which, combined, account for about 37 percent of the market, said the report. The remainder of sweep vehicles includes offshore investments and other depository instruments.
The fact that money funds gained in popularity last year despite several successive interest rate increases is testament to their strong appeal as sweep vehicles, said Anthony J. Carfang, co-founder and partner at Treasury Strategies. As interest rates rise, the rate of return on money market funds tends to lag behind other cash-equivalent securities because the money fund portfolios are still holding lower yielding securities. Yet banks' corporate clients still embraced lower yielding money funds, he said.
"Money market institutional funds have gained an aura of respectability among corporate treasurers," Carfang said. In the past, corporate treasury personnel had felt that using money funds instead of selecting individual securities was not adding value to the investment process, he said. But that idea has changed, he said.
Commercial banks are increasingly willing to make money funds, especially their own proprietary money funds, available as sweep vehicles to their corporate banking clients, Carfang said.
"Last year especially, banks have preferred to raise as much money as possible beyond what they need to fund loans, and they prefer to put them [new assets] into their own bank proprietary fund families," said Carfang. The Treasury Strategies report found that the sweep assets of smaller banks are growing at a faster pace than those of bigger banks.
Banks have been lured into offering sweep account products because of the consistent growth of sweep account assets, said the report. Sweep account assets have grown at an annual rate of between 20 percent and 30 percent over the past three years, the report said.
Sweep account assets grew to more than $270 billion in 2000. In 1991, they held less than $20 billion, said the report. Sweep accounts continue to be the fastest growing bank product, the report said.
Money market mutual funds used for sweeps have consistently shown the most growth over the last several years, said the report. Money fund sweep assets have grown dramatically from 1999 to 2000, rising 34 percent in that period, said the report.
Several factors have contributed to the popularity of banks using money funds in which to sweep assets, said Rob Phillips, vice president and sales manager of cash management services at Federated Investors of Pittsburgh. Banks are being flooded with so much cash from customers that their strictly regulated ratio of assets to liabilities is being affected, he said. Banks that use money funds in sweep accounts are able to shift that cash off their balance sheets. Also, banks that are using their own finite portfolio of securities as collateral for the purchase of other types of non-money fund sweep investments for customers are finding they are running short of securities to pledge.
For banks, it is less costly and less of a burden to shift assets in and out of money funds than other vehicles, Phillips said.
For smaller banks that do not sponsor and manage their own proprietary money funds, using a third party's money funds within a sweep account can work just as well, Phillips said. Federated, which is a large provider of institutional money funds for use in bank sweep accounts, has seen an increase in interest among banks, he said. A proprietary money fund would have to attract between $500 million and $1 billion for the sponsoring bank to make an adequate profit on the fund, said Phillips. Consequently, smaller banks often look to larger providers for a money fund to use as their sweep vehicles, he said.