Reserve Funds to Launch Sweeps for Small Banks
Hunter, Matthew, American Banker
Reserve Funds of New York is set to launch a product designed to make it easier for banks, particularly small ones, to pay interest on commercial checking accounts.
Big banks have gotten around federal restrictions on offering interest on business checking through the use of sweep accounts, in which repurchase agreements let them keep client deposits on the books while "sweeping" them to a money market mutual fund and back.
The Reserve Return Sweep account, which will be available Aug. 1, will use a technological solution to eliminate the administrative hassles of the repurchase agreement, said Bruce Bent 2d, co-creator of the product and president of the company. It will also allow an unlimited number of sweep transactions from the fund to the deposit account, sidestepping a federal limit of six such transactions a month, he said.
Frontier Bank of Everett, Wash., will be the first bank to use the account for its commercial depositors. The bank had been looking for a product that could pay interest on commercial deposits without hampering loan growth, said John Dickson, senior vice president of its parent, Frontier Financial Corp.
The Reserve Return Sweep account is designed for banks with assets of up to $3 billion, whose ability to fund loan growth would be hampered by repurchase agreements, Mr. Dickson said. Such agreements wipe collateral from institutions' books that they could otherwise use to secure borrowings from the Federal Reserve or the Federal Home Loan Banks, he said.
For banks like $1.6 billion-asset Frontier, the alternative to Reserve Funds' new account is to incur the expense of offering high-interest-bearing certificates of deposit, which are currently yielding around 7% in the Pacific Northwest, Mr. Dickson said. By using Return Reserve Sweep, the bank would be able to keep the deposits on the books to fund lending, he said.
"This allows me to compete with nonbanking institutions" for customer deposits, Mr. Dickson said. Before deciding to go with the Reserve Funds product, Frontier was close to signing a deal with Fidelity Investments for sweep services, he said.
Mr. Bent would not explain how his firm will skirt the six-transfer monthly limit for sweep accounts, beyond saying it involves the use of technology. …