Flows Linked to TAG Expiration Are Limited

No wholesale shift out of bank accounts has been seen despite the end of unlimited FDIC coverage.

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.

“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,

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