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Unlimited FDIC insurance on noninterest-bearing accounts expires at the end of 2012, throwing the safety and security of cash back into the spotlight.
Vincent Ryan, CFO.com | US
July 6, 2012
Thanks to the impending expiration of a federal program at year-end, treasurers should start managing their cash transaction accounts more closely, and they will almost surely have to expose their companies to greater counterparty risk next year. They will face some tough choices in an interest-rate climate where many cash vehicles don't earn enough to reward risk-taking.
Designed to guard against massive withdrawals from small banks during the financial crisis, the U.S. government's Transaction Account Guarantee (TAG) program has, since October 2008, provided unlimited insurance on businesses' noninterest-bearing transaction accounts, used for payroll processing, for example. Government backing influenced many companies to move a large portion of their cash holdings — some of which previously went to money-market funds and T-bills — into TAG accounts. Total balances in the accounts grew even after the financial crisis ended, and only last quarter began to fall slightly, to an estimated $1.3 trillion.
But after being extended three times, including once under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the TAG program will cease at the end of 2012. Without the program, noninterest-bearing transaction accounts are insured only up to $250,000.
"The concept married company investment policies perfectly: the idea of being able to allocate an unlimited amount of money to a vehicle that's going to provide absolute safety and security and that's liquid is pretty attractive," says Brandon Semilof, managing director of StoneCastle Partners, an investment adviser that among other services offers the Federal Deposit Insurance Corp.–insured Federally Insured Cash Account for banks and corporations.
In a near-zero interest-rate environment, it didn't make sense for companies to take on credit risk when they could get earnings credits for their deposits and have them fully insured, Semilof says. But in less than six months, treasurers will little choice but to take on some risk once again. Whereas now their counterparty is the U.S. government, next year it will be "XYZ bank," he says.
"Now all of a sudden [companies] have to be comfortable with the underlying credit," says Semilof. Some companies had their entire portfolio sitting in a TAG account with one bank, but when TAG expires, prudent risk management will dictate splitting up funds among more than one financial institution.
With money-market funds less appealing due to regulatory changes, treasurers may turn to U.S. government issues. Short-term U.S. Treasury bills like the one-month could attract some corporate money, but currently it is yielding only six basis points. In addition, it would take a year for the Treasury to issue enough T-bills to satisfy former TAG balance depositors, says a report by StoneCastle Partners. (The Treasury auctions about $30 billion in one-month T-bills weekly.)
n addition, "even buying a one-month T-bill, you're taking on volatility and pricing risk because something could happen in the interim between now and when the T-bill matures," says Semilof.
Congress has not made a move to extend TAG again. But community-bank trade groups say the program should be continued, because it supports small-business lending and the removal of the deposits from small banks will hurt communities.
Community banks believe business depositors will flee to "too-big-to-fail" banks that may be perceived as still having the implicit backing of the U.S. government. "The TAG program helps prevent even greater deposit concentration in a handful of large institutions while also mitigating their funding advantage - at no cost to taxpayers," wrote Cam Fine, president and CEO of the Independent Community Bankers of America, in a June blog.
In a letter to the Senate in late June, a coalition of service providers to community bankers pointed out that losing TAG deposits could significantly reduce the overnight liquidity of community banks. That "could force a major change to a bank's balance sheet," the bankers wrote.
Financial institutions with assets of more than $50 billion already have an 84% share of all TAG deposits (as of March 31), even though their total share of industry assets is 70%, according to the StoneCastle report. Such banks also grew their TAG balances by $381 billion in the 12 months ending March 31.
But StoneCastle says TAG's expiration will be only a "glancing blow" to community banks, and that even without it, financial institutions with less than $10 billion in assets would still have higher noninterest-bearing deposit ratios than larger banks.
"It seems that most arguments are for the program to expire," says Semilof. "[Companies] are now accustomed to getting something for nothing, and they're accustomed to the idea of having no credit risk. That's not something that should become the norm: it should be the exception with these type of accounts."