How liquid are money market accounts?

Money market accounts are highly liquid assets in the sense that they can be quickly converted into cash without losing value. In fact, except for limits on the availability of recently deposited funds, money market account deposits are available for immediate withdrawal.

The two factors that limit money market account liquidity, as compared to checking or deposit savings accounts, are bank requirements to maintain a minimum balance and limits on the number of withdrawal transactions. It is important to note that money market accounts, which are federally insured deposit accounts, are different from money market funds offered by investment banks.

Money Market Accounts Provide a Stable Deposit Base for Banks

Commercial banks and credit unions provide money market accounts to attract relatively large, stable deposits in exchange for interest rates that are slightly higher than those for savings accounts and interest-bearing checking accounts. This stable deposit base increases the financial institution's ability to make loans. This need for stability gives rise to the only substantive liquidity limitations, which are the requirement to maintain certain balances and the limit on the number of withdrawals. Violating these balance requirements and transaction limits may reduce the interest earned on the deposits or increase the fees paid.

Money Market Accounts and Money Market Funds Are Not Interchangeable

The fact that money market accounts are insured, and therefore regulated, by the Federal Deposit Insurance Corporation provides a regulatory and structural support for these accounts. Of course, the ability to recover loss through insurance is not a practical source of liquidity since such a recovery may take up to two business days. However, this federal insurance is an important, and often misunderstood, distinction between money market accounts and money market funds.