The expiration of transaction account guarantees requires actions from treasury cash managers. While essentially all of the $2.0 trillion growth in domestic deposits since 2007 went to the 20 largest banks, the banks’ deposit credit strength declined by almost three ratings notches over the same period. Although 13 of the 20 had Aaa deposit ratings in 2007, only one maintains that rating today. A major cause for declines in deposit strength has been reduced government support for large banks which could lead to losses for uninsured depositors.
We urge treasury practitioners to carefully evaluate the standalone credit strength of their current banks and make proper deposit diversification decisions. Money market funds and separately managed accounts also may be viable alternatives in dealing with TAG expiration.
In two short months, treasury management professionals will face a major milestone, the expiration of the Transaction Account Guarantee (TAG) program on non-interest-bearing bank deposits. Recently, the program has received a lot of publicity over the possibility that it will be re-extended, leaving practitioners having to prepare for both scenarios – continued guarantees or a reversion back to uninsured deposits.
In this context, we think that it is important to understand how bank deposit strength has changed since the financial crisis began five years ago. For depositors who may choose to remain in uninsured deposits after the TAG expiration, the standalone credit strength of the deposit-taking banks will become their primary credit protection.
Background on the TAG Program
The Federal Deposit Insurance Corporation (FDIC), along with the U.S. Treasury Department, created the TAG program on October 13, 2008, to encourage liquidity in the banking system by providing full insurance coverage on non-interest-bearing transaction accounts, regardless of dollar amount. Described as an Interim Rule, the program originally was scheduled to end on December 31, 2009. On August 26, 2009, the FDIC extended the program for six months, through June 30, 2010. It again extended the program on May 26, 2010, through December 31, 2010.
The deposit guarantee program currently in place is a similar, but legally separate, program authorized by a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Officially known as the Dodd-Frank Deposit Insurance Provision, the new guarantee program replaced the FDIC’s TAG program and provides coverage on non-interest-bearing transaction accounts through December 31, 2012.
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