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Restored FDIC Cap May Affect Deposit Accounts
Restored FDIC Cap May Affect Deposit Accounts
Since Congress seems unlikely to extend the Federal Deposit Insurance Corporation’s (FDIC) Transaction Account Guarantee Program (TAG) by its December 31, 2012, expiration date, non-interest-bearing accounts like checking or savings accounts will no longer enjoy unlimited FDIC insurance coverage.
For individuals with deposits that would exceed the standard insurance amount of $250,000 per depositor (per bank for each ownership category), it may be time to reassess your liquidity needs and desired yield, and consider if excess funds should remain at the financial institution or if it's time to make alternative investments elsewhere.
Notice of the expiration was issued in Financial Institutions Letter FIL-45-2012.
Implemented in 2008, TAG was designed to maintain depositor confidence in the U.S. banking system during a time of crisis. It provided an effective incentive to increase bank deposits, and until December 31, 2012, provides unlimited guarantees for non-interest-bearing transaction accounts. With financial institutions on much more solid footing than they were four years ago, many believe Congress will let the enhanced guarantees expire.
“Increased FDIC coverage levels were targeted to protect the banks, not depositors,” says Mark A. Griffin, CIMA®, chief investment officer and principal, CliftonLarsonAllen Wealth Advisors, LLC. “Without TAG it is highly likely there would have been a cascade of additional bank failures resulting from runs on banks by fearful depositors.”
Here are three issues to consider as you reassess where you invest funds in light of the new FDIC cap:
Bank safety and soundness
TAG expiration translates into a shift of risk back to a banking system. This is not a negative, as the system has strengthened significantly since 2008. The number of banks currently classified as “troubled” by the FDIC peaked in March 2011 and has declined each subsequent quarter. The number of annual bank failures peaked in 2010 and has continued to decline.
The U.S. banking system is also subject to more regulation and oversight since TAG was implemented, and the results of the 2012 election decrease the chance that the regulatory burden, such as that imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, will be lessened in the near future.
“Although the banking system has improved, depositors should continue to monitor the safety and soundness of their institution by tracking the capital ratios and industry metrics of their institution in relation to industry peers,” says Todd Sprang, CliftonLarsonAllen financial institutions partner.
The current low interest rate environment is expected to continue for several years. Finding an acceptable alternative may prove difficult for individual depositors unless they are willing to consider longer-term investments with longer maturities. Even if they are willing to lengthen maturity to increase yield, depositors should recognize that the majority of potential uninsured deposits are held by large corporations in the largest U.S. institutions.
It is estimated that there is $1.6 trillion in deposits that have had unlimited FDIC insurance coverage under the TAG program. With a potential transfer of more than $1 trillion of uninsured deposits, competition for yield could become intense and could favor larger depositors who bank with large institutions. Alternative investments with explicit or implicit government guarantees include direct purchases of U.S. Treasury bills and other government agencies.
Depositors should recognize that FDIC insurance coverage for highly liquid, interest-earning deposit accounts remains at the standard coverage limit of $250,000 after January 1, 2013, so depositors should re-evaluate their account structure to take full advantage of the liquidity of deposit accounts and maximizing insurance coverage. If you hold greater than $250,000 at any one time in a single insured bank under one of the account ownership categories, you should start considering what you will do to limit your risk subsequent to December 31, 2012.
How we can help
Our advisors can help you understand how the end of the TAG program might impact the FDIC guarantees on your deposited funds, and help you explore alternative investments that may meet your yield and liquidity needs.
Todd Sprang, Financial Institutions Partner
email@example.com or 630-954-8175