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Money Market Deposit Account

Money Market Deposit Account ( MMDAs)

Now that we have seen how banks manage their liquidity through repos, eurodollar markets, and the fed funds market, another way for banks to get around to paying higher interest on deposits to customers was by creating a new type of deposit called the Money Market Deposit Account.

Money markets are markets for short term securities (ie with maturities less than a year) such as T-Bills, certificate of deposits, commercial paper etc. However these are high valued securities out of reach by the common individual. However pooling by creating a fund solved that problem.

Mutual fund managers of stock markets were looking for new markets to invest in during stock market declines. Investors move money during stock market crashes to cash or interest bearing securities as they are lower risk. To mobilise these funds mutual fund managers setup mutual funds that invested in money markets called MMMF. Investors found this to be a good alternative to bank deposits due to the restrictions placed by Reg-Q.

By the early 1980s there were $240 billion in assets. Due to pooling they offered greater diversification and liquidity than owning individual securities directly. MMM funds were also able to offer cheque writing privileges through their banks. With mutual funds capturing bank deposits, banks were allowed to compete with money market mutual funds by creating a new deposit called the money market deposit account or MMDA under the Germain Act of 1982. The MMDA offers a competitive interest rate, checking facilities at the expense of higher risk.

 

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