Seal of the Board of Governors of the Federal Reserve System

WASHINGTON, D. C.  20551

SR 90-31 (FIS)
September 21, 1990


SUBJECT: Bank Holding Company Funding from Sweep Accounts

                        A key principle underlying the Federal Reserve's supervision of bank holding companies is that such companies should be operated in a way that promotes the soundness of their subsidiary banks.  Holding companies are expected to avoid funding strategies or practices that could undermine public confidence in the liquidity or stability of their banks. Consequently, bank holding companies should develop and maintain funding programs that are consistent with their lending and investment activities and that provide adequate liquidity to the parent company and its nonbank subsidiaries.

Funding by Sweeping Deposit Accounts

                        A principal objective of a bank holding company's funding strategy should be to maintain an adequate degree of liquidity at the parent company and its subsidiaries.  Funding mismatches can exacerbate an otherwise manageable period of financial stress and, in the extreme, undermine public confidence in an organization's viability.  In developing and carrying out funding programs, bank holding companies should give special attention to the use of overnight or extremely short-term liabilities since a loss of confidence in the issuing organization could lead to an immediate funding problem. Accordingly, bank holding companies relying on overnight or extremely short-term funding sources should maintain a level of superior quality assets, namely, assets that can be immediately liquidated or converted to cash with minimal loss, that is at least equal to the amount of those funding sources.

                        A potential source of funding mismatch arises from the use of what has been commonly referred to as deposit sweeps. This practice is based upon an agreement with a subsidiary bank's deposit customers (typically corporate accounts) which permits these customers to reinvest amounts in their deposit accounts above a designated level in overnight obligations of the parent bank holding company.  These obligations include such instruments as commercial paper, program notes, and master notes.

                        In view of the extremely short-term maturity of most sweep arrangements, banking organizations should exercise great care when investing the proceeds.  Appropriate uses of the proceeds of deposit sweep arrangements are limited to short-term bank obligations, short-term U.S. Government securities, or other highly liquid, readily marketable, investment grade assets that can be disposed of with minimal loss of principal.1  Use of such proceeds to finance mismatched asset positions, such as those involving leases, loans, or loan participations, can lead to liquidity problems at the parent company and are not considered appropriate.  The absence of a clear ability to redeem overnight or extremely short-term liabilities when they become due should generally be viewed as an unsafe and unsound banking activity.

                        Reserve Bank supervisory and examination personnel are asked to ensure that bank holding companies and state member banks are in compliance with this and related supervisory letters addressing the marketing of uninsured debt instruments, including master notes and other sweep arrangements.  Banking organizations not in compliance should take the necessary steps to achieve full compliance within a reasonable period of time.  Reserve Banks should provide copies of this supervisory letter to any bank holding company engaged in sweep arrangements with their subsidiary banks, or to any other organization if necessary to facilitate compliance.

William Taylor
Staff Director

Cross-References: SR 80-620
 SR 90-19
 SR 90-20


1.  Some banking organizations have interpreted language in a 1987 letter signed by the Secretary of the Board as condoning funding practices that may not be consistent with the principles set forth in this supervisory letter and prior Board rulings. The 1987 letter involved a limited set of facts and circumstances that pertained to a particular banking organization; it did not establish or revise Federal Reserve Policies on the proper use of the proceeds of short-term funding sources. In any event, banking organizations should not be relying on the 1987 letter to justify the manner in which they use the proceeds of sweep arrangements. Banking organizations employing sweep arrangements. Banking organizations employing sweep arrangements are expected to ensure that these arrangements conform with the policies contained in the supervisory letter on bank holding company funding and liquidity dated June 22, 1990 and this supervisory letter.  Return to text

SR letters | 1990