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Money Market Accounts

A money market account is a savings account much like any savings account available through a bank. Money market accounts are also offered by credit unions. These accounts are sometimes called money market demand accounts or money market deposit accounts. This account is different from other savings accounts in that the interest rate is usually higher and the minimum deposit is usually $1,000 or more. Banks and credit unions also normally allow checks to be written against these accounts. Withdrawals can also be made, although usually withdrawals are limited to three or four per month. A debit card may also be provided for withdrawals from an account.

Money market accounts at banks are insured by the Federal Deposit Insurance Corporation (FDIC) like any other bank account so that funds will not be lost in the event that the bank fails. At a credit union, money market deposits are insured by the National Credit Union Administration (NCUA), a similar federal agency.

Deposit institutions often offer a money market mutual fund along with a money market deposit account. An important distinction between them is in the form of investment used in management of the funds. Funds in money market accounts are invested in low risk government and commercial investments like United States Treasury Bonds, Treasury Bills, savings bonds, and certificates of deposit. The rate of return typically earned from these investments is low, but the risk is negligible or even nil. The money market mutual fund, on the other hand, while still designed to minimize risk, utilizes investments that do have a slightly higher risk, and thus are expected to pay a higher return.

Money market mutual funds are still invested in debt instruments, but normally these are commercial debt instruments, such as notes owed by private companies, rather than government debt instruments. The money market mutual fund is closer to a stock mutual fund in the method of investment used; even though the risk is always much lower than that of a stock mutual fund. A more important difference between the two is that the money market mutual fund is not a bank or credit union account and is not guaranteed by the FDIC or NCUA. Also, these mutual funds incur expenses that are passed on to investors and their value is subject to greater fluctuation than the value of a money market account, which generally does not fluctuate.

Money market accounts are competitively sold by banks and credit unions. Return rates vary from institution to institution. At the same time, there are also fees charged to holders of these accounts, and fees will vary, too. Often, a higher return rate is associated with higher fees. There are a number of groups and agencies that track and report on money market account performance. Funds are rated according to earnings and fees. Potential investors may wish to review some of these reports, and they are available on the Internet as well as in publications released by major banks and investment companies.

Repairing the Damage to Money Market Accounts

The situation immediately after the Lehman Brothers’ declaration of bankruptcy in September of 2008, can only be described as tumultuous for money market account holders. This seeming safe investment, in an industry of about $2.65 trillion, was suddenly not so safe and investors were making a run on funds.

This panic encouraged the U.S. Congress to pass the Dodd-Frank Act which led to new regulations including the formation of the Financial Stability Oversight Committee. However, three years later, this situation is still unclear and many feel that money market accounts may be permanently tarnished.

According to Bloomberg News, after the Lehman collapse, “Money market funds were among several financial intermediaries, collectively known as the shadow banking system, that attracted intense government scrutiny during and after the financial crisis.” This bankruptcy was a serious credibility blow to money market account holders and thousands of formerly stable banks and fund companies were unable to raise short-term debt.

Immediately after the bankruptcy, institutional investors withdrew $230 billion from the industry over three days. This forced money funds, which are the largest buyers of commercial paper, to stop buying and start selling. The financial bleeding was staunched by the Treasury Department’s guarantee of money market funds and the Federal Reserve’s purchase of the assets of the funds (at full value) to enable them to cover redemptions.

At the time, it seemed that every regulator, legislator and financial pundit had an opinion on solving this money market account problem, but a final decision on the remedy is still in a holding pattern. The latest twist comes from the President’s Working Group on Financial Markets.

This advisory group proposed that the funds abandon their stable share price. Money market funds value their investments based on their expected payoff at maturity and this allows them to maintain a steady $1 share price. All ROI is credited to customers and distributed monthly.

The money market industry feels that this stable price is a critical selling advantage. Unfortunately, it also makes it more vulnerable to runs, in the opinion of industry critics. They note that this encourages investors to flee after even small losses, reducing a fund’s net-asset value.

The final decision on this and other issues related to money market account holders will come from the Financial Stability and Oversight Committee. Interested parties expect this decision to be rendered at the end of 2011 or beginning of 2012. Regardless if you feel that Money Market Accounts have been explained all investors should make sure that they absolutely understand all of the facts about MMA’s. We strive to be a great resource but we know that we’re not the ultimate source of information. Check back for updates on rates and more articles while we strive to be the best resource for money market accounts explained.