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An investment sweep service creates the ultimate dilemma for the average banker. If the product is offered, the customer's needs are met, but the banker doesn't fulfill the requirement of growing the bank's deposit base. To eliminate this sales quandary, a bank can use shadow accounting within its investment sweep program. This approach allows the needs of banking line units to be met while maintaining the integrity of the external financial statements.
Investment sweep programs emerged in the early '80s as a means to invest customers' idle cash because regulations prohibit banks from paying interest on commercial checking accounts. Typically, sweep services move funds out of a commercial checking account and invest the monies on an overnight or short-term basis. Banks provide a variety of investments, such as repurchase agreements, commercial paper, and off-shore deposits. From a regulatory and financial accounting perspective, sweep transactions are reported as investments. Generally accepted accounting principles (GAAP) recognize the reduction of deposits and the purchase of an investment with a given maturity. The effect of the GAAP entry on a financial institution's balance sheet, therefore, reflects an erosion of deposit dollars and normally an increase in other borrowings.
The banker's dilemma is this: The loss of precious balance sheet deposits makes bankers hesitant to sell investment sweeps to their business customers. A banker's success traditionally has been measured on loan and deposit growth. But bankers also are aware that sweep arrangements now are commonplace in the financial industry and that customers are becoming more sophisticated with their investments. If sweeps are not part of an integrated cash management package offered to existing or prospective customers, critical market share will not grow or be maintained, which can result in decreased profitability.
Hesitancy by an account officer to market a sweep service proactively can result in a lost relationship. In this scenario, the customer perceives that the product was not marketed actively and that his or her needs and best interests were not addressed. Other banking and nonbanking competitors are ready to offer sweeps. This environment puts the banker in a defensive position.
A SHADOW ACCOUNTING APPROACH
To solve the banker's problem, a shadow accounting approach can be implemented that:
* Measures the "true" funding/deposit position of banking line units,
*...