Significant money might soon exit banks. As 2013 nears, investors are preoccupied with the fiscal cliff, and rightly so. While much is being written about potential tax hikes and federal spending cuts, less attention is being given to another significant change that 2013 may bring: the reduction of deposit insurance on non-interest bearing checking accounts.
In 2008, the Federal Deposit Insurance Corporation introduced unlimited coverage for these accounts, which corporations commonly use to handle payroll, bill paying and lease payments. Passage of the Dodd-Frank Act extended the unlimited coverage until the end of 2012. Analysts doubt it will be extended further. If it isn’t, FDIC insurance coverage on these accounts will be cut to $250,000 in 2013.1,2,3
The FDIC estimates that $1.4 trillion in deposits will be left uninsured in January if Congress fails to act. A flood of cash could inundate the money markets as a result.3
Could this lead to a negative interest rate environment? What will businesses do if their non-interest bearing transaction accounts are only insured up to $250,000? Some of that money could leave banks and end up in money market funds as well as short-term Treasuries, commercial paper and mortgage-linked securities.
This implies downward pressure on short-term yields and more frustration for savers tired of pitiful returns on money market funds, CDs and “high interest” savings accounts. Yields on short-term government securities could fall further into the red.
On July 5, the European Central Bank set its deposit rate on excess reserves to 0%. Eurozone cash investors are basically paying banks to keep money safe. Would the Federal Reserve ever make such a move? The chances are faint. The chance of Congress extending the FDIC unlimited insurance may be much greater.4
Nothing changes for interest-bearing accounts. In case you are wondering, FDIC coverage for interest-bearing checking and savings accounts, CDs and money market funds remains at $250,000 for 2013. Coverage will also remain at that level for Keogh plans and traditional, SEP, SIMPLE and Roth IRAs.1
Rob Cryts may be reached at 978-256-1820 firstname.lastname@example.org.
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1 - www.suntimes.com/business/savage/15946629-452/what-do-fdic-limit-changes-at-end-of-year-mean.html [10/25/12]
2 – www.fdic.gov/deposit/deposits/unlimited/expiration.html [11/5/12]
3 – www.bloomberg.com/news/2012-10-04/fdic-insurance-end-may-spark-money-market-turbulence-pimco-says.html [10/4/12]
4 - www.economist.com/node/21558596 [7/14/12]