By James R. Barth, Auburn University, USA, barthjr@auburn.edu | Mark Mitchell, AQR Arbitrage, LLC, USA and University of Chicago, USA, mark.mitchell@chicagobooth.edu | Yanfei Sun, Toronto Metropolitan University, Canada, yanfei.sun@torontomu.ca
Sweep deposits are a relatively recent and important innovation that allows the seamless transfer of client cash from brokerage firms to bank accounts andvice versa. We find that funds swept from brokerage firms to banks vary inversely with stock market performance. When the stock market declines, retail investors reduce risk and sell stocks, with the proceeds swept out of brokerage firms and into banks. The relation is asymmetric as sweep deposits do not appear to decline in response to positive movements in the stock market. Sweep deposits are the primary driver backing the same asymmetric relation between domestic bank deposits and the stock market. Moreover, sweep deposits provide additional financing stability to banks as households reduce risk by converting stocks to deposits during stress periods, helping to fund drawdowns in lines of credit by firms.