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."
