One question on any banker's mind right now should be: where will nearly $1 trillion in deposits go when the unlimited insurance coverage of non-interest bearing transaction accounts expires on December 31? Unless extended by Congress, any amount in excess of $250,000 in one deposit account will not be covered by the Federal Deposit Insurance Corp. (FDIC)
The majority of these funds are sitting right now in non-interest bearing accounts, mostly checking, a category that experienced the greatest growth in balances since the beginning of the recession. In December 2007, which is the official start of the recession, the total amount deposited in non-interest bearing accounts was about $1.2 trillion. By the end of 2011, this had grown to $2.3 trillion – an increase of $1.1 trillion.
The enormous growth in balances is attributed to the various programs that provided unlimited insurance to non-interest checking accounts. The first was the FDIC’s Temporary Liquidity Guarantee Program (TAGP), which was instituted on October 14, 2008. During the period that TAGP stayed in effect, until December 31, 2010, balances in non-interest bearing accounts grew to $1.7 trillion – an increase of nearly $500 billion since the beginning of the program.
At the end of 2010, TAGP was replaced by the Dodd-Frank Act, which extended the unlimited insurance on non-interest bearing transaction accounts for two more years, until December 31, 2012. However, unlike the TAGP, the Dodd-Frank Act definition of non-interest bearing transaction accounts did not include either low-interest Negotiable Order of Withdrawal (NOW) accounts or Interest on Lawyer Trust Accounts (IOLTAs). This extension gave another boost to balances of non-interest bearing accounts, which soared to nearly $2.3 trillion by December 31, 2011, an increase of $600 billion in one year.
So the trillion dollar question remains: where are all the excess funds likely to go? The answer might be discovered by analyzing the data from the first quarter of 2012, when checking account balances decreased by $43 billion for the first time since the introduction of the unlimited insurance program in late 2008, potentially signaling the early stages of the excess funds shift. At the same time, savings account balances increased by $171 billion, which could suggest that some or all of the excess funds (over the $250,000 insurance limit) shifted to FDIC-insured savings accounts. Both certificate of deposit and money market balances declined in the first quarter of 2012, which indicates that excess funds from checking accounts did not flow there.
The likelihood, then, that the excess funds will be moved outside the protection of FDIC insurance at yearend is very slim. If consumers were willing to trade yield for safety by depositing funds in non-interest bearing accounts just to have it insured, they are very likely to keep the funds in FDIC-insured deposits for as long as their confidence in the economy remains shaky and until equity market volatility subsides.
Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, where he oversees the research and analytics services of the company. He can be reached at email@example.com.
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