The FDIC's latest Quarterly Banking Profile shows that "Money Continues to Flow into Fully Insured Deposit Accounts." The report says, "Deposit balances registered strong growth for a sixth consecutive quarter, as large-denomination transaction accounts that offer unlimited insurance coverage through the end of 2012 continue to attract new depositors. Total deposits at insured institutions increased by $183.2 billion (1.8 percent). Over the last six quarters, deposits at FDIC-insured institutions have risen by more than $1 trillion. Most of the growth has consisted of large-denomination noninterest-bearing transaction deposits that are fully insured until the end of 2012. Balances in these accounts increased by $191.2 billion (13.7 percent) during the fourth quarter, and totaled $1.58 trillion at the end of the year. In contrast, nondeposit liabilities declined by $99.5 billion (4.5 percent), while deposits in foreign offices fell by $66.6 billion (4.5 percent)."
The FDIC's Quarterly explains, "Total assets of the nation's 7,357 FDIC-insured commercial banks and savings institutions increased by 0.6 percent ($76.1 billion) in the fourth quarter of 2011. Total deposits increased by 1.8 percent ($183.2 billion), domestic office deposits increased by 2.9 percent ($249.7 billion), and foreign office deposits decreased by 4.5 percent ($66.6 billion). Domestic noninterest-bearing deposits increased by 8.3 percent ($173.2 billion) and savings deposits and interest bearing checking accounts increased by 2.3 percent ($103.8 billion), while domestic time deposits decreased by 1.5 percent ($27.3 billion). For all of 2011, total domestic deposits grew by 11.2 percent ($881.9 billion), with domestic noninterest-bearing deposits rising by 34.2 percent ($578.1 billion) and domestic interest-bearing deposits increasing by 4.9 percent ($303.7 billion)."
The FDIC adds, "At the end of the fourth quarter, domestic deposits funded 63.1 percent of industry assets, the largest share of assets funded by domestic deposits since the fourth quarter of 1994 when the share was 63.3 percent. Insured institutions had $2.3 trillion in domestic noninterest-bearing deposits on December 31, 2011, 70 percent of which ($1.6 trillion) were in noninterest-bearing transaction accounts larger than $250,000. Of this total, $1.4 trillion exceeded the basic coverage limit of $250,000 per account, but is fully insured until the end of 2012. Deposits receiving the temporary coverage funded 4.2 percent of assets at banks with less than $10 billion in total assets and 11.6 percent of assets at banks with more than $10 billion in assets. The total amount receiving temporary coverage increased by 15.2 percent ($185.1 billion) during the fourth quarter. For all of 2011, deposits receiving the temporary coverage increased by 63.2 percent. The following table shows the distribution of accounts receiving unlimited coverage on noninterest-bearing transaction accounts by institution asset size."
A footnote explains, "The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted on July 21, 2010, provides temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts from December 31, 2010, through December 31, 2012, regardless of the balance in the account and the ownership capacity of the funds. The unlimited coverage is available to all depositors, including consumers, businesses and government entities. The coverage is separate from, and in addition to, the insurance coverage provided for a depositor's other accounts held at an FDIC-insured bank."
Analysts have begun speculating whether the unlimited FDIC insurance will be extended. J.P. Morgan's Alex Roever wrote in his most recent "Short Term Market Outlook and Strategy," "The extension of the TAG program has clearly benefited both cash investors and banks alike. But with the program set to expire at the end of this year, it also has the potential to instigate a large shift in liquidity, reversing the benefits that have been set in place. For one, investors who previously parked their cash at banks for the unlimited insurance may no longer view those deposits as an attractive investment. They may in the coming months determine that it's best to redeploy their money, presumably into other cash-like alternatives, such as money market funds. The rationale behind the move is that if the government insurance were to go away, the credit quality of uninsured deposits at isolated banks (currently facing sovereign, economic, and downgrade risks) may be riskier than money funds that diversify their portfolios across a full spectrum of credit products. All else equal, money funds may seem to be the best alternative investment."
He adds, "Ultimately, the simplest thing for policymakers to do may be just to extend the guarantee program and avoid any type of market disruptions. But that's much easier said than done. The extended coverage was introduced in the Dodd-Frank Act, and the law would need to be reopened and amended, something Congress has been reluctant to undertake. Given that it's also an election year, we place a low probability of this happening."
Barclays Capital's Joseph Abate wrote recently, "Our sense is that Congress and the FDIC will agree to extend unlimited insurance -- but along the lines of past extensions. The program could be temporarily extended but at an explicit fee -- say 10bp and banks would have the option of participating. Recall that effective last April, the assessment base on which deposit insurance premiums are calculated was expanded to equal average total assets less tier one capital. Although the FDIC does not publish the average assessment rate for the largest 19 banks, we can infer based on the distribution of the average assessment base that these banks are paying between 10 and 15bp. So a 10bp opt-in charge might be competitively unattractive. Given the strength of interest-bearing deposit flows (that is accounts not covered by the unlimited insurance guarantee and whose behavior is therefore independent of the FDIC's decisions), we expect most of the largest banks would opt out of the program if the cost of participation is increased."
He adds, "Assuming that the 19 largest banks, which hold a preponderance of the insured deposits, decide not to participate in 2013, it is not entirely clear that the $500-600bn in balances that left money funds since the end of 2010 would return.... [W]hile some of the $500-$600bn will likely return to money funds, we suspect a sizeable portion could remain at the largest money center banks. The proportion that stays will be higher if, the SEC moves money funds to floating NAVs (which we consider to be unlikely) or if, the SEC imposes daily redemption limits (far, more likely)."
