Retail Sweeps Fall Significantly

posted by Nima

January 17, 2009 · Posted in Monetary Economics 



Retail Sweeps November 2008

I wrote about the significance of retail sweeps in The True Money Supply.

Retail sweeps have been rising consistently since their inception in 1994 (except for two immaterial $1.3 billion drops in October and November 2006). Now it seems like this has come to an end.

In October 2008 retail sweeps fell by $4.9 billion, and in November they fell by $20.8 billion, a 3.3% drop over 2 months. It will be interesting to watch their development over the next months to see and by how much their drop counteracts the increase of all other monetary components.

Explanation: Retail sweeps are an accounting technique by which banks declare a small part of their checking account deposits as savings deposits. As a result they can loan out more money since savings deposits have no minimum reserve requirements. Now banks have begun to reverse this policy and have begun to reduce the amount declared as savings deposits.

What exactly is behind this policy? I’m not sure, but the following points should be considered:

  • Banks have no incentive whatsoever to lend money at this point, due to a highly leveraged customer base and an ongoing credit contraction and consolidation
  • Thus there is no need on their part to reclassify part their demand deposit accounts as savings deposits
  • The reserve ratio is at an all time high anyway, so if banks wanted to loan money all they’d need to do would be to loan against their regular checking deposits
  • Hence, it appears as though retail sweeps are an excellent indicator for the banks’ propensity to be fully loaned up

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