Tuesday, October 23, 2012
Unlimited FDIC Insurance Set to Expire
If you are responsible for treasury management at your company then a scheduled change in the FDIC insurance coverage may impact how you manage your cash assets. For many years we were accustomed to a cap on the amount of deposits the FDIC would insure per institution. During the financial crisis of 2008 the FDIC changed its rules to provide unlimited insurance on non-interest bearing bank deposits in an effort to help prevent outflows from banks. This unlimited guarantee is set to expire December 31, 2012.
The Wall Street Journal published a good article today written by Emily Chasan. It raises many good points as well as shares the perspectives of many tasked with treasury management. Her article follows below…
The $1 Trillion Balancing Act
Companies Weigh Banking Risks Against Alternatives as Insurance Change Nears
By EMILY CHASAN
A looming change in federal insurance on bank deposits is forcing corporate cash managers to reassess the safety of their banks and has them poring over their investment policies to determine how much money they can keep in any one institution.
The task is gaining urgency as the Federal Deposit Insurance Corp.'s unlimited guarantee on noninterest-bearing bank deposits nears its Dec. 31 expiration.
The FDIC introduced the blanket guarantee in 2008 to keep corporate deposits from fleeing banks during the financial crisis. It has provided a haven for corporate cash for the past four years. Banks are holding more than $1 trillion in assets under the program. After it expires, only the first $250,000 of each deposit will remain insured.
With few good options in sight, company treasurers are scrambling. At the annual conference of the Association for Financial Professionals last week in Miami, two panels promising ideas on safe places to park corporate cash drew standing-room-only crowds, and some people had to be turned away.
Many treasurers follow policies that require them to assign risk weightings to bank deposits and limit balances in any single bank. But when their deposits were fully insured by the U.S. government, they only had to consider the strength of the federal guarantee.
"We'll have to go back to evaluating credit risk, rather than sovereign risk," Winston Cummins, assistant treasurer at apparel retailer Lululemon Athletica Inc., LULU -0.45% said at the conference.
Measuring credit risk has gotten more complicated, however, because many banks have lower credit ratings than they did before the financial crisis. In June, Moody's Investors Service cut its ratings on 15 banks, including J.P. Morgan Chase & Co. and Bank of America Corp. BAC -1.53%
In addition, many traditional cash alternatives, such as auction-rate securities, are no longer an appealing choice. Those securities once were viewed as the equivalent of cash, but the market for them froze during the financial crisis, tarnishing their reputation for liquidity.
Money-market funds also pose potential problems: Corporate treasurers have spent much of the past year limiting their holdings of money funds with exposure to the euro-zone crisis.
"As a treasurer our No. 1 goal is to preserve corporate assets, not to chase yield," said Jeff Cappelletti, treasurer at security company G4S GFS.LN -0.98% Secure Solutions, a unit of G4S PLC. "But there were a lot more options a few years ago, and the problem now is that everyone has cash and there is nowhere to put it."
Banks and money-market funds are stepping up their efforts to figure out how much money might move once the FDIC guarantee expires. A survey of nearly 1,000 AFP members at last week's conference found 49% expect to hold less in bank deposits six months from now, while 48% expect to keep deposits steady. Just 3% said they expected to increase deposits.
Treasurers like Mr. Cappelletti, who keeps most of his company's deposits at Bank of America, say they are generally comfortable leaving cash in the largest U.S. banks without insurance. But smaller banks are worried about losing deposits, and big banks are concerned companies might spread their cash across more institutions.
Lawmakers have been quiet about any extension of the unlimited guarantee ahead of next month's elections. But former FDIC Chairman Sheila Bair said the guarantee's abrupt end could create instability in the banking system. In an interview, she said it should be phased out instead. "My fear is that once the guarantees go away, the small-enough-to-fail banks are going to lose deposits," she said.
An FDIC spokesman declined to comment
Large banks, including J.P. Morgan and Citigroup Inc.'s C -1.48% Citibank unit, say their bankers are talking with treasurers about handling credit risk. Some banks also have hired consultants to gain a better understanding of treasurers' intentions. "I haven't heard treasurers definitively say they are going to do X or Y," said Andrew Gelb, Citibank's head of North America treasury services.
While J.P. Morgan fully expects to hold on to most deposits, "we're helping corporate clients understand what their counterparty risk is," said Diane Quinn, managing director at J.P. Morgan Treasury Services.
Money-market funds and other investments, whose own options are limited by factors such as low interest rates and the European debt crisis, are checking that they can handle corporate inflows without compromising returns for their current investors.
"The longer a corporation waits to make a decision, the fewer the options will be," said Richard Saperstein, managing director at corporate adviser Treasury Partners. "If $1 trillion is trying to find its way into money-market funds in the past few weeks of December, it's going to be a challenge."