U.S. companies to cut bank balances if guarantee expires -survey

Mon Dec 10, 2012 11:42am EST

* Firms said may reduce cash at banks if FDIC program ends

* Money seen flowing into money funds, T-bills

* Future on TAG guarantee uncertain in Washington

NEW YORK, Dec 10 (Reuters) - U.S. companies plan to reduce their bank account balances by an average of 20 percent if a federal guarantee program on unlimited insurance on such accounts expires at year-end, an industry survey released on Monday showed.

They will pull some of the cash from large business checking accounts into money market mutual funds, Treasury bills and other short-term investments, according to the annual survey by the Association for Financial Professionals (AFP).

The group, based in Bethesda, Maryland, has 16,000 members including treasurers, cash managers and other financial professionals.

On Dec. 31, the Federal Deposit Insurance Corp (FDIC) is set to terminate its "Transaction Account Guarantee," or TAG. The program insures bank deposits of more than $250,000, the amount the FDIC normally covers, in checking accounts that do not pay interest.

TAG was created in September 2008 during the height of the global financial crisis. It was intended to help stabilize the banking system as the collapse of Lehman Brothers roiled financial markets. TAG was meant to reassure depositors that their money was safe and to ensure that businesses and local governments had access to cash.

Under TAG, money kept in large business accounts grew to $1.49 trillion at the end of the third quarter, according to the most recent FDIC data.

In the latest AFP "Business Outlook," 51 percent of members' cash and short-term investments were held in bank accounts, which was more than double the 23 percent in 2006.

"Should unlimited FDIC insurance expire at the end of the year, 51 percent of organizations expect to move at least some of their cash and short-term investment portfolios away from non-interest bearing bank accounts into other investment vehicles," the group said of the survey results.

Estimates vary on the dollar amount of withdrawals from large checking accounts if TAG expires. Research firm Wrightson ICAP forecast a drop in the range of $200 billion to $250 billion in early 2013.

TAG was originally scheduled to end in December 2009, but it was extended to 2012 with the passage of the Dodd-Frank financial regulations.

This program has pitted checking accounts used by companies and government agencies against money market funds, due to TAG's explicit federal guarantee and increased caution among companies after the 2007-2009 global credit crunch, analysts said.

There have been attempts in Washington to extend TAG but it is unclear whether they will succeed given the White House and Congress' negotiations to avert a fiscal crisis, they said.

When asked what they would do if TAG does expire in three weeks, 28 percent of those organizations that plan to cut cash holdings said they will reduce bank deposits by between 10 and 24 percent; 21 percent will reduce these holdings by between 25 and 49 percent, AFP said.

Some might make more drastic cuts. Twenty percent of the organizations that plan to reduce bank balances said they will do so by 50 percent or more, the survey found.

"The most likely destinations for any cash and short-term investments removed from bank accounts would be money market funds and Treasury securities/agency bonds," AFP said.

According to the group's survey, 42 percent of organizations said they would move at least some of cash from bank accounts into Treasury-based money market funds, while 41 percent would invest in Treasury securities and/or agency bonds.

More than a third said they anticipate using prime money market funds that could invest in riskier debt, including corporate debt, while 20 percent of them said they move at least of the money into repurchase agreements.

There are signs that corporate treasurers have begun shifting money into money market funds. Last week, money fund assets rose for a third straight week to their highest level since March at $2.620 trillion, according to the Money Fund Report.