The flood of money moving out of U.S. banks when unlimited Federal Deposit Insurance Corp. coverage expired at the start of this year doesn’t seem to have materialized. At the end of 2012, an estimated $1.5 trillion held in non-interest bearing bank accounts lost FDIC coverage when a financial crisis program, the Transaction Account Guarantee program (TAG), expired and FDIC insurance reverted to a maximum of $250,000. Much of the newly uninsured money was expected to shift from banks to other short-term investment products, like money-market funds, but in fact, banks saw more money coming in than going out late last year.
“What was expected was that when deposit insurance was scaled back to $250,000, there would be hundreds of billions flowing out of banks,” Anthony Carfang, a partner at consultancy Treasury Strategies, said during a webcast earlier this month. Instead, “during the fourth quarter of 2012 leading up to the Dec. 31 expiration, deposits at U.S. banks actually increased,” he said.
Federal Reserve data show bank deposits grew $357 billion, or 4%, during the fourth quarter.
“Either the market believes banks are healthier and don’t need deposit insurance,” Carfang said, “or corporate treasurers believe this money is guaranteed implicitly by the government.”
Money funds did see more money coming in late last year and at the start of this year. Overall, money funds added $79.73 billion in assets in the three weeks ended Jan. 9, although that was followed by a $15.19 billion decline in the most recent week, according to data from the Investment Company Institute (ICI), an organization representing U.S. investment companies.
Institutional money funds, the type used by corporate treasuries, saw inflows of $59.38 billion in the three weeks ended Jan. 9, followed by an outflow of $5.73 billion in the most recent week, ICI data show.
The fact that both banks and money funds saw net inflows makes it hard to say how much money was being shifted from banks to money funds, according to Chris Plantier, a Senior Economist at ICI. “Our impression is that investors had a lot of cash at year-end, and they put some of it in banks and some of it in money funds,” Plantier said.
The money that flowed into both banks and money funds might reflect investors’ worries late last year about the fiscal cliff and their uncertainty about tax changes, Plantier said. “People were realizing capital gains, receiving dividends,” Plantier says. “People had a lot of cash.”
One sector where the effect of TAG’s expiration seems to have been visible is among companies that take large amounts of institutional money, divide it up into chunks small enough to qualify for FDIC coverage and place it with banks, a service known as deposit placement or extended FDIC coverage. Such companies generally place the funds with community banks, which are more hungry for deposits than money center banks and willing to pay a slightly higher yield.
“In early December, we began to see significant new money,” said Phil Battey, Senior Vice President of External Affairs at Promontory Financial. “In December and early January, the average weekly new money was more than 75% higher than in November.”
Promontory offers Certificate of Deposit Account Registry Services, or CDARS, in maturities ranging from four weeks to five years, via a network of 3,000 banks. An investor can go to any bank in the network and it will accept a large sum, divide it into insurable amounts and farm those portions out to other banks in the network. The majority of money in CDARS comes from corporations and other institutional investors, Battey said,
Stephen Rotello, CEO of StoneCastle Cash Management, also cites a pickup. “Last week we took in $100 million in new deposits,” he said. StoneCastle offers the Federally Insured Cash Account, or FICA, which gives investors weekly access to their funds, which are held as overnight demand deposits.
Tom Nelson, Chief Investment Officer at Reich & Tang, which offers the Demand Deposit Marketplace, added that banks are also are exhibiting more interest as they look for ways to reassure their investors in the wake of TAG’s expiration. “Clearly the community banks are increasing their ability to offer these programs,” he says.
Nelson agrees that the amount of money being shifted in respond to TAG’s expiration was “muted” compared with the talk going into year-end, but notes that investors had plenty of warning that the unlimited insurance was going away.
“Those people that were really, really worried about having their deposits in an uninsured position, they acted before year-end,” he said. “The largest group of investors have their deposits at larger banks where the too-big-to-fail argument makes them comfortable.”
Some investors may have held off acting in hope that TAG would be renewed. Senate Majority Leader Harry Reid proposed legislation in November that would have extended TAG for two years, but the Senate blocked the measure in December. “Our sense of the market was that there was not as much planning as we would have expected,” said StoneCastle’s Rotello.
January is a busy time for companies and for banks, he says, but treasurers are assessing the situation and figuring out what to do with their cash.
“In some cases, if their funds are at large money center banks, they may say, ‘My funds are safe,’” Rotello said, but adds, “As the months roll on, I would expect to see treasurers continue to reallocate their cash.”