Can someone please help with question 3. Can someone please help with question 3
ID: 2809779 • Letter: C
Question
Can someone please help with question 3. Can someone please help with question 3. d he Federal Reserve Bank in its district to help offset the charges assessed against the bank for using Federal Reserve services? 3. What are sweep accounts? Why have they led to a significant decline in the total legal reserves held at the Federal Reserve banks by depository institutions operating in the United States? . What impact has recent financial reform legisla- tion had on raising short-term cash? om its discount window. In contrast, a deposito ooits or assets, wh1Explanation / Answer
Sweep accounts work on the principle of "Cash/Money should not sit idle". Whenever you have some cash which exceeds certain threshold, the extra amount gets 'sweeped' into a higher interest-earning investment option. Say, you deposited $50 in your Sweep account where the requirement was only for $25, the balance of $25 gets transferred to a higher interest paying investment option.
Now, coming to the Fed, depostory insitutions while depositing their money/cash with Fed earn prime rate (the rate offered by the Fed) which is much less than the rates in the market, in fact, prime rates are the benchmark rates and any other rate would be more than prime rate (Fed savings are safest and hence the returns are low, rememeber the dictum 'Higher the risk, higher the return'). So naturally anyone with more money than the required would want to earn more than the rate which he is guarnateed to earn. Hence, the reserves gets 'sweeped' away from Fed deposit to an investment instrument which pays more.