Wells Fargo Advantage Money Market Funds discusses the possible and pending expiration of unlimited FDIC insurance in its latest "Overview, strategy, and outlook." The piece says, "Deposits in non-interest-bearing bank accounts currently benefit from unlimited Federal Deposit Insurance Corporation (FDIC) insurance coverage, which is scheduled to expire at the end of December. This has led to much speculation about whether or not the coverage might be extended and, if not, whether the money in those accounts might move to different types of investments, including money market funds."
Wells continues, "The current program of unlimited FDIC insurance is an extension of a series of temporary programs going back to October 2008, when, at the height of the financial crisis, the basic insurance limit was increased from $100,000 to $250,000 through the end of 2009 as part of the Emergency Economic Stabilization Act of 2008. That month, the FDIC implemented the Transaction Account Guarantee (TAG) Program, which provided unlimited insurance for all noninterest-bearing transaction accounts (NIBTAs) through the end of 2009. In May 2009, the increase in the basic ceiling was extended through the end of 2013, while in August 2009, the TAG Program was made optional at a sliding fee scale.... When offered the opportunity to drop the fee-based unlimited FDIC coverage, more than 1,100 banks, most of them smaller-sized institutions, chose not to continue."
The commentary explains, "In July 2010, the Dodd-Frank Act was passed, making the increase in the basic insurance ceiling permanent and extending the unlimited insurance on NIBTAs through December 31, 2012. As we approach year-end, policymakers face three alternatives with respect to NIBTAs. They could extend the Dodd-Frank Act provisions, however this would require Congressional approval, and an extension was not included in the recently passed continuing resolution. With elections looming next month and control of the House and Senate split at least through January, this alternative doesn't seem likely at this point. There is also the question of where the executive branch sits on the matter."
Wells tells us, "A second option would be to adopt a form of unlimited or significantly higher insurance limit for a fee, and to allow banks to opt in or out, similar to the amended TAG Program. This might be more politically acceptable, since many of the bigger banks would be likely to opt out of the program, but again it would require the approval of Congress and the president. The third alternative would be to do nothing and simply allow the insurance to lapse. While potentially most disruptive to the current scheme, the political ease of the "do nothing" aspect of this decision makes it seem to us the most likely outcome."
The piece adds, "The backing of the U.S. government, constant value, and ease of transacting has made NIBTAs favored by many institutional investors, especially in the corporate treasury space. Earnings credits against services also mean that these accounts, while not bearing interest, are not without some positive economic benefit to the depositors. Should the unlimited FDIC insurance expire, investors would seem to be faced with an array of investment decisions they haven't had to contemplate for a while."
Wells says, "With respect to their newly uninsured balances, they could: Leave the money where it is as an uninsured deposit. Diversify among different banks to keep balances under the $250,000 insurance limit at each bank. Invest in longer-term securities or other investments. Invest in short-term securities, either on a self-directed basis, through a managed account, or by purchasing shares in a money market fund (MMF)."
Finally, the article adds, "Given that these soon-to-be-uninsured depositors are most likely to have larger balances at larger banks, which of their limited investment options are they most likely to choose? The 2012 AFP survey indicates that much of this money is likely to stay right where it is, with 59% of the respondents indicating that in the event of the termination of the unlimited FDIC coverage, they expect no significant reduction in short-term investments held in NIBTAs, where they now hold on average 51% of their short-term cash."
