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FDIC Insurance Deadline Could Prompt Major Money Moves

  • By Andrew Deichler
  • Published: 2012-11-28

All of the talk about the fiscal cliff has pushed another looming deadline with major implications for treasurers into the background. Even so, with unlimited FDIC insurance on non-interest bearing bank accounts expiring at the end of the year, corporates are faced with tough decisions on what to do with the cash they have hoarded since the passage of the Dodd-Frank Act in 2010.

Temporary deposit insurance was intended as a safe haven for corporate cash as part of the Dodd-Frank Act. Earlier this month, the FDIC reiterated its warning that the coverage will not be extended, and will therefore revert back to $250,000 per account as of January 1.

According to the onsite survey conducted at the 2012 AFP Annual Conference in October, corporates are split on what they will do with their cash at the end of the year but one outcome is clear: the share of corporate cash held in bank deposits—51 percent according to AFP research—likely peaked in 2012. Forty-eight percent of respondents anticipate making no changes to their level of cash held in bank deposits through at least the first quarter of 2013 while 49 percent said they would lower their balances. Only 3 percent are projecting an increase.

These results reveal a slight increase in urgency on the part of corporates, when compared to last summer’s 2012 AFP Liquidity Survey. In that survey, three out of five respondents said they did not expect their organizations to reduce the amount of short-term investment balances maintained in non-interest bearing accounts after the expiration.

According to the Liquidity Survey, about 58 percent of financial professionals say their organizations use non-interest bearing accounts for cash and short-term investments. Even if only half of those practitioners lower their balances, that is still a lot of money on the move.

Investment options and strategies

Where are corporates likely to park their cash if not in bank deposits? Two in five of all Liquidity Survey respondents indicated that they might diversify their holdings by reducing short-term investment in non-interest bearing accounts. The survey noted that the most likely place these organizations could put that cash would be prime money market funds (MMFs), Treasury-based MMFs and Treasury securities and/or agency bonds.

Jim Gilligan, CTP, assistant treasurer of Great Plains Energy Inc. and chair of AFP’s Government Relations Committee (GRC), told AFP that he expects there to be “somewhat of an exodus” from banks due to the expiration of the insurance.  “The question is where that money will go with interest rates so low,” he said. “Money market funds will definitely pick up some deposits but banks will retain funds because ECR is higher than MMF rates.”

Al Rodack, senior director- financial services at The Ohio State University and also a member of the GRC, agreed that corporates will likely move some of their funds elsewhere—but how much will depend on whether banks continue to offer attractive earnings credit rates to pay bank fees. "I believe some of the funds will move into money market funds, primarily the government funds," he said.  "I believe corporate treasurers will have to do more credit due diligence before deciding to keep money invested in unsecured bank deposits, which are tending to pay a higher rate than money funds."

The MMF industry could see some resurgence if corporates decided to move a significant portion of the money there, but that likely hinges on possible new regulations that could make MMFs less attractive for corporate investors. The debate about MMF reform appeared to come to a close when the SEC tabled new proposals earlier in the fall, however, the Financial Stability Oversight Council (FSOC) approved three possible recommendations earlier this month that could drastically restructure the investment vehicles. These recommendations mirrored the reforms proposed by Securities and Exchange (SEC) Chairman Mary Schapiro and supported by Treasury Secretary. Though Schapiro is stepping down, her immediate successor, Elisse B. Walter, was the one other SEC commissioner who supported the reforms. Still, with three out of four remaining commissioners opposed to MMF reform, there might be some time before action takes place, if at all.  But potential MMF reform no doubt adds complexity to the decisions pending about corporate cash.

In a recent interview, Denise Laussade, CTP, director, office of treasury operations at Purdue University and a member of the GRC, explained that Purdue is heavily reliant on MMFs and the proposed reforms would likely lead the institution to refrain from investing in them. Laussade added that if the debate resurfaces, she hopes that policymakers will continue to seek input from corporate practitioners. “I do hope that they'll realize that they scored a great deal of perspective and knowledge by coming to those investors in those instruments and will rely on us yet again to provide that insight and that perspective if [MMF reform] is once again brought up for discussion,” she said.

However, some treasury and finance professionals have expressed reluctance to abandoning money market funds with reform, according to a series of follow up interviews on the topics covered in the Liquidity Survey.  Another practitioner in academia admitted to finding few adequate alternatives. “Our thinking has evolved and we’ve swallowed twice and three and four times and said, ‘We are not going to like this, but we don’t see any choice,’” said the practitioner. “We’ll figure out how to learn to live with money market funds marking their assets to the market every day, or not maintaining a stable NAV. We’ll bite the bullet and grin and bear it.”

Others are looking for alternative strategies. One financial professional at a manufacturing company explained that if both events occur—ending of unlimited FDIC insurance and MMF reform—one option is to move cash into individual portfolios with differ¬ent banks under short-term investments. “This strategy change is actually taking the cash and putting it into three separate buckets,” said the practitioner. “One will remain where it is in money markets with an allocation of funds that we need, one will be an intermediate investment portfolio, and another one would be a little bit longer.”

The longer duration on the third investment would only be a maximum of 18 months. “So it’s going out the yield curve, taking out a little additional interest-rate and a little bit of credit risk, but not going so far,” he said. “It’s like a separate portfolio for cash. It will be invested, and we’ll probably spread them out across different banks. We have 10 banks in our bank group, so we have more than enough banks to cover us.”

AFP is currently polling members about the implications of the FDIC insurance expiration in the 2013 Business Outlook Survey, in order to provide and even timelier picture of what lies ahead. The report is slated for December 10.

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All rights reserved.

Copyright © 2014 Association for Financial Professionals, Inc. - All rights reserved.
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