The overnight interest rate is generally the rate that banks borrow from the Federal Reserve known as the Fed Funds rate. Banks need to have adequate deposits on hand to meet their lending requirements. At the close of each day banks may borrow from each other or the Federal Reserve.
When liquidity is tight, the rate is higher. When the economy is doing well and funds are readily available the rate is lower.
Since business checking accounts were generally not eligible for interest sweep accounts were originally set up as a workaround of government regulations that provided some interest to large cash deposits.
Nowadays sweep accounts are also offered to individuals as a means of investing extra funds. Some sweep accounts keep the excess money in a money market fund until the level in the checking account is depleted. At that point, the money is swept back into the checking account. In such cases, the sweeps do not necessarily have to be overnight.
In addition to banks, brokerages and credit card companies also offer sweep accounts.
Funds can be swept into money market funds, CDs and any other investment option.
Banks may even sweep funds into overseas funds called Eurodollar funds. These funds are not FDIC insured as banks can lend on these funds without meeting lending reserve requirements. These funds attract the highest interest rates.
Banks can also place funds into Repurchase Sweeps also known as Repo sweeps. In this transaction, the funds are collateralized by bank bonds.
In any event, the key is – don’t let your money sleep.