Sweep account

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A sweep account is an account set up at a bank or other financial institution where the funds are automatically managed between a primary cash account and secondary investment accounts.

Overview[edit]

A sweep account is a combination of two or more accounts at a bank or a financial institution. It is useful in managing a steady cash flow between a cash account used to make scheduled payments, and an investment account where the cash is able to accrue a higher return.

Many banks and financial institutions offer a sweep account service for personal customers and small business owners. It has also become part of the arsenal of services offered by credit card companies.

Mechanics[edit]

In banking, sweep accounts are primarily used as a legal workaround to the prohibition on paying interest on business checking accounts. In this system, the funds are described as being "swept overnight" into an investment vehicle of some kind. The choices for sweep investments are often the following: money funds, and what are known as "Eurodollar Sweeps" or "Repo Sweeps".

Larger corporate bank accounts are charged numerous fees for each of the services the bank offers (such as a charge per every check deposited), however the bank rebates these fees based on the companies account balances in a process known as account analysis.

How it actually works[edit]

In a sweep account

  1. A cash account is set up first and a lump sum of money is deposited into that account.
  2. A financial advisor and the client will discuss and determine an average balance that should be kept in this account. Depending on the institutions service, this amount may be pre-determined.
  3. Most of the extra cash above the average balance will be invested into a money market, CD, or some other form of investment that can be easily liquidated.
  4. When the balance in the cash account falls below the pre-determined average balance, some of the investment is liquidated and the proceeds get deposited into the cash account, thus maintaining the average balance.

If the initial calculations are done correctly, the interest on the cash and returns on the investments should yield a large enough return that will increase the total value of the sweep account.

During a bad economic cycle, the funds in the investment accounts may fall low enough that substantial gains will not be possible to maintain the average balance in the cash account. In these cases, the financial institutions would ask either for more funds to be put into the investment account, or recommend other forms of investments and liquidation.

The financial innovation of sweep accounts is particularly interesting because it was stimulated not only by the desire to avoid costly regulation, but also by a change in supply conditions- in this case technology.

Company policy issues[edit]

Some companies choose to have all of their funds swept into a sweep account if they believe that the increased earnings will more than offset the fees they would have been rebated, should they have left the funds in the account. Other companies calculate the approximate amount needed to rebate the fees and then only sweep funds in excess of that amount.

Companies pay extra for more complex investment strategies, and for more detailed communication from their bank. For example, knowing when the checks they issue will probably clear, enables them to more precisely determine how to invest and for how long. This service is known as controlled disbursement.