Runs to Banks: The Role of Sweep Banking Deposits During Market Downturn
The stock market has experienced numerous significant downturns, with one of the most significant and recent declines occurring in early 2020 due to the COVID-19 pandemic. When these disruptive events occur, retail investors reduce risk and sell stocks, with the proceeds channeled to safer investments, including federally insured bank deposits. Using actual sweep deposit data from TD Ameritrade and its affiliated banks, along with estimated sweep deposit data across the broader banking sector, we are the first to examine the role of brokerage firms in serving as intermediaries in channeling funds from stock investors to banks at times when financial markets are under stress.
Our empirical analysis uncovers a robust and negative relation between stock market returns and sweep deposits of customers at TD Ameritrade. More specifically, we find that sweep deposits growth is significantly related to stock returns when they are negative, but not when the stock returns are positive. This finding indicates that there is an asymmetric relationship between sweep deposits growth and stock returns. We view this result as consistent with the “run to the bank” thesis; as stock markets drop, brokerage customers reduce exposure to risky assets and thereby raise cash, which is swept to banks.
We also find a significant inverse relationship between stock market returns and cash sweeps when using both aggregate and individual bank data. Indeed, the stock-return coefficients for the sweep deposits results are over five times that for the results of domestic deposits. Intuitively, to the extent that investors reduce exposure to the stock market during stress periods, the reduction is magnified regarding sweep deposits due to their origin, namely, brokerage accounts. Overall, the results suggest that sweep deposits are an important driver behind the relation between domestic deposits and stock market activity, a previously unexplored finding.
In addition, while regulators have been concerned about the lack of stability of brokered deposits as a funding source for several decades, we find that brokered deposits do not increase the overall deposit volatility. Indeed, despite their high volatility, the addition of sweep deposits appears to stabilize rather than destabilize traditional deposits. The relatively recent innovation of bank sweeps not only provides a growing and diversified funding source for banks as an alternative to branch networks, but critically, during periods where banks are subject to bank runs by borrowers looking to draw down their lines of credit. Thus, from a policy standpoint, this finding may be informative, and further help evaluate the funding stability of sweep deposits.
James R. Barth, Mark Mitchell & Yanfei Sun (2025). Runs to Banks: The Role of Sweep Banking Deposits During Market Downturns (external link) . Critical Finance Review: Vol. 14: No. 2, pp 277-328. DOI: 10.1561/104.00000159
