Money Market Accounts

Bank Money Market Accounts

As part of the continuing deregulation of banks to allow them to compete more successfully with other financial institutions, federal authorities in late 1982 authorized them to offer money market rates to their customers. This has brought banks into direct competition with private brokerage houses, for whom these funds have been a primary source of income in a period of high inflation and high interest rates. For consumers, the benefit of such funds in recent years has been the high interest rates they have paid. Although these rates are not guaranteed — they traditionally vary with the rates being paid on such federal securities as Treasury bills — in the early 1980’s their yields were, on the average, significantly higher than yields offered by most other forms of investment.

In the competitive atmosphere of late 1982, when bank money market accounts first became available, both commercial and thrift institutions were offering initial interest rates in excess of the rates offered by brokerage houses — inducements to tempt investors to transfer their funds from the brokerage houses to the banks. The high rates were guaranteed for only a short period, often no more than a week, after which they often dropped into line with the rates offered by the investment concerns.

In one respect, at least, banks have a significant advantage over investment houses in attracting investors to their money market accounts: bank deposits are insured by the federal or state agencies while the investment houses can offer no such guarantee of safety. However, it should be noted that as of mid-1983, no investor had lost a penny through money market funds operated by brokerages.