Setback on Extension to FDIC Unlimited Insurance?

A technical move in the Senate has blocked consideration of Harry Reid’s proposal to extend unlimited FDIC Insurance on non-interest bearing accounts. Senator Toomey noted the extension would require additional Federal funds and thus violate the Budget Control Act. A vote to waive this requirement failed to garner the required 60 votes.

With unlimited insurance facing an all-but certain death at year-end, corporations that have not yet acted must now rebalance their portfolios among various instrument classes and banks to diversify counterparty risk and balance risk/return considerations. In many cases, investment policies will force larger corporations to act.  

As noted before, Treasury Strategies expects several outcomes as a result of the expiration of unlimited insurance:

• Small banks and banks with weak credit ratings will see an outflow of large deposits
• Some bank deposits will flow into government or highly rated money funds and high quality direct money market instruments (e.g., agencies, T-bills)
• Public sector deposits will flow out of ECR but will find few banks willing to take on significant new balances in repos or collateralized deposits due to the unfavorable economics of such deposits. Some public sector entities may literally have to shop aggressively to find banks that will take collateralized deposits or repos
• Banks will have to deploy new services for clients with credit risk concerns or regulatory requirements for low-risk holdings – these will include separately managed accounts, ultra-short funds that provide some yield in exchange for longer maturities, sweeps to money funds, alternative collateral structures and, for select entities, trust accounts with targeted portfolio and cash management structures
• In the long run, public sector entities with highly onerous collateral requirements will have to redraft these requirements so as to ensure their various governmental bodies can find avenues to place their cash