One short year ago, we discussed three key trends for 2011: low interest rates, a spreading sovereign debt crisis and persistent financial regulation. And we started our 2011 commentary with the phrase, “meet the New Year, same as the old.” Have we caught you in a moment of déjà vu?
For 2012, we see these trends remaining very much in place and trying the patience of the fatigued corporate cash investor. We also want to alert our readers to three fresh challenges on the horizon in the New Year. They are: the end of unlimited FDIC insurance for non-interest bearing deposits, the end of supplemental capital support for housing government-sponsored enterprises (GSEs) and the further decline of available money market debt.
We believe the confluence of developing credit risk, the loss of safe havens, regulatory uncertainty regarding money market funds, declining money market supply and the low yield environment call for strong in-house cash investment strategies, including separate account management.
The End of Unlimited FDIC Deposit Insurance
Of the three challenges facing corporate treasurers, we think that the end of unlimited FDIC insurance for non-interest bearing deposits has the greatest potential to dramatically alter the supply and demand dynamics of corporate cash management. As credit concerns mounted, yields dropped and faith in money market funds diminished, corporate treasurers in recent years decided to defer investment decisions and opted to park cash in FDIC-insured accounts. With that insurance expiring soon, bank credit concerns and decisions on how and where to best redeploy the cash once again will confront corporate treasurers.
Note that the earnings credit rates (ECRs) of up to 0.50% on some non-interest-bearing accounts have been more attractive than the sub 0.10% earned on money market funds for much of 2011. Although the ECRs, essentially fee rebates against charges on banking services, have been declining in recent months, the yield advantage and their risk-free nature provided enough incentive for some treasurers to choose bank checking accounts over other cash alternatives. But, with the pending expiration of the unlimited FDIC deposit insurance, corporate depositors will need to assess the ECRs as rates of return on stand-alone bank credits.
The Federal Deposit Insurance Corporation’s full deposit insurance for non-interest bearing accounts (above the previous $250,000 limit) began in October 2008 after the collapse of Lehman Brothers . Originally scheduled to end by year-end 2009, the program first was extended to June 30, 2010, and was later extended again to December 31, 2010. Then, the Dodd-Frank Deposit Insurance Provision kicked in, further extending deposit guarantees to December 31, 2012 .
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