Without some fast action by federal banking regulators or Congress between now and year-end, a huge portion of corporate cash deposits held at U.S. banks will no longer be risk-free.
The Transaction Account Guarantee program, which provided unlimited Federal Deposit Insurance Corp. backing of noninterest-bearing transaction accounts, is set to expire on December 31. Come the new year, anything above $250,000 will once again be unprotected by FDIC insurance.
Community banks have been lobbying heavily for an extension of TAG, saying it would cause companies to move deposits en masse into the largest U.S. banks.
In September, Paul Merski, chief economist of the Independent Community Bankers Assn., said, “Congress is rolling the dice if it does not promptly extend FDIC TAG insurance coverage. Nearly $1.4 trillion in TAG deposits would become abruptly uninsured overnight on December 31.” In particular, Merski was concerned about the “giant element of uncertainty” that would face depositors such as small businesses, farmers, nonprofits, and municipalities.
Congress doesn’t appear primed to act on an extension. But the FDIC, which created the program in October 2008, could issue an administrative order that brings back TAG on an optional, pay-to-participate basis, says a report by Capital Advisors Group (CAG), an investment-research firm. If it does, smaller commercial and community banks may opt to fork out for the insurance.
To avoid concentrating all of their cash with one counterparty, says the CAG, institutional depositors many find it time to spread out the large deposits held at the top 20 banks. They could also find ways to use multiple transaction accounts at multiple banks and keep the balances under $250,000 for each. Regardless, treasury departments will have to monitor their deposit counterparties more closely after January 1.
The largest U.S. financial institutions are no longer inherently safe because they are big, says the CAG.
TAG helped the large banks substantially. The $2.04 trillion growth in domestic deposit balances at these banks since 2007 slightly outpaced the total increase of $2 trillion at all banks. “Small banks actually lost deposits, on balance,” says the CAG report.
But with the federal government pulling back on support for systemically important banks, tools like Moody’s Investors Service’s long-term deposit ratings suggest the biggest banks are not bulletproof.
Moody’s ratings grade the actual banks taking the deposits, not the credit rating of the holding companies, and 18 of the 20 largest banks have had their rating downgraded since 2007. The average rating fell almost three notches, from “Aa2” to “A2.” Regions Bank was downgraded seven notches, and Bank of America and Citibank lost six and five rating notches, respectively.
Treasurers will have to weight those ratings against the results from internal analyses of smaller banks.
There is a potential benefit to TAG’s ending: CFOs willing to have less than absolute safety and security for their short-term corporate cash — and whose investment policies allow it — could actually earn a small amount of interest from their banks again. For a corporate account to qualify for TAG, it had to be a noninterest-bearing account. Without the government backstop, the CAG paper points out, cash managers may move some of the uninsured money to certificates of deposit and savings accounts.
Regulated asset pools such as money-market funds, short-term bond mutual funds, and exchange traded funds may also become more attractive again, says the CAG report.