Analysis: Money funds could gain if banks lose TAG accounts

NEW YORK Wed Jul 18, 2012 2:41pm EDT

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NEW YORK (Reuters) - Money market funds could attract substantial sums of cash if unlimited government insurance on bank accounts used by corporations and some municipalities expires at year-end.

More than a trillion dollars now reside in bank transaction accounts that pay no interest, but are popular due to uncapped insurance by the Federal Deposit Insurance Corporation (FDIC).

"The expiration of TAGs (Transaction Account Guarantees) would be the best news money funds have seen in the past five years," said Peter Crane, president of Crane Data, which tracks money market mutual funds.

Indeed, the 2008 financial crisis and an ensuing period of low interest rates that makes it hard to offer investors a good return on short-term money have given money funds - with $2.55 trillion in assets as of July 11, 2012 - a tough few years.

Without the enticement of unlimited insurance, corporate and municipal treasurers who now use the TAG accounts to manage short-term cash might put some of those funds into money market funds in hopes of earning at least some return on the money.

"No one knows the exact amount (that would return to money market funds), but it's safe to say we're talking in the hundreds of billions of dollars," said Jerry Klein, managing director and partner at HighTower's Treasury Partners, with $20 billion in assets under management.

FDIC $250,000 INSURANCE CAP DISAPPEARS

That the FDIC insures bank accounts up to $250,000 is widely known. But fewer people are aware of the unlimited FDIC insurance provision that TAG accounts enjoy -- or how much the balances in those accounts have grown since their inception.

Intended to help stabilize the banking system, the transaction (TAG) accounts with their unlimited insurance coverage were forged by the FDIC, in consultation with the U.S. Treasury and Federal Reserve Board, in the fire of the 2008 financial crisis.

In 2010, The Dodd-Frank Act said all banks must participate in the program. The FDIC then extended the unlimited insurance provision on the accounts, citing "lingering effects" of the financial crisis and the risk that letting the TAG program expire when the economy was weak could cause some community banks already under stress to lose deposits and risk failure.

The provision is now set to expire on December 31, 2012.

A TRILLION HERE, A TRILLION THERE

In just over two years, however, the amount of deposits insured by the FDIC through the TAG program has nearly quintupled, according to FDIC quarterly banking data.

The 6,400 depository institutions involved in the program held an estimated $266 billion of deposits above the typical insured deposit limit of $250,000 - and guaranteed by the FDIC through the TAG program - at the end of 2009.

By March 31, 2012, however, total assets in the Dodd-Frank Domestic Noninterest-Bearing Transaction Accounts larger than $250,000 had grown to $1.507 trillion.

The portion that exceeded the usual $250,000 limit on FDIC insurance was $1.319 trillion.

An industry expert who declined to be named called the growth of FDIC-insured money in the TAG accounts "astounding."

POPULAR WITH CORPORATE TREASURERS

The average size of the account was $1.996 million as of March 31, 2012, according to the FDIC, and the average number of such accounts per institution was 103.

The accounts appeal to businesses because of the unlimited insurance provided by the FDIC. And when interest rates are low, as they are now, the opportunity cost of keeping funds in an account that pays no interest is minimal.

But if the federal insurance guarantee on the large transaction accounts ends on December 31, at least some of the money in those accounts would likely move into money market funds in the hope of earning at least some return.

MORAL HAZARD? WHAT MORAL HAZARD?

The question for policy makers is whether to extend the federal insurance protection to these large TAG accounts beyond year-end.

To the money market fund industry, the no-limit FDIC insurance on TAG accounts gives banks an unfair edge in the competition for cash that businesses and investors deposit to handle their short-term cash management needs.

The Investment Company Institute (ICI), which represents U.S. investment firms, including money market mutual funds, says Congress should not extend the TAG program.

In contrast, the Independent Community Bankers of America, representing community banks, favors a five-year extension of the unlimited FDIC insurance provision, saying it could be phased out when confidence in the economy and global financial system is more robust.

In Chicago this week, the American Bankers Association (ABA) decided to support a two-year extension of the TAG program.

The ABA board was persuaded by conversations with bankers across the country and evaluating information from the FDIC, ABA chief lobbyist James Ballentine told Reuters.

The FDIC remains neutral on the issue.

"It's a decision for Congress to make," said FDIC spokesman David Barr.

(Editing by Leslie Gevirtz)

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