One of the many scary events in 2008 was that money had nowhere safe to go. The failure of the Reserve Fund meant cash was not safe and the banks were teetering, leaving corporate treasuries with no place to safely park the cash they would need to weather the financial crisis. Congress stepped in and created the Transaction Account Guarantee program which provided a safe haven. The Transaction Guarantee Program extended FDIC insurance to an unlimited amount for non-interest bearing checking account.
One could argue that this is a gift to banks. They get free deposit money. Normally FDIC insurance stops at $250,000 for an account. Anything in excess of that is at risk. With TAG, the cash is not at risk so long as the account does not earn interest. In these days of extremely low interest rates, a no interest account is enticing if it offers no counterparty risk.
With the expiration of TAG program scheduled for January 2013, that cash would likely flee some banks. There is a lot of that cash. It’s estimated that there is $1.6 trillion in account deposits covered by TAG. That means corporate treasuries would have to start spreading the risk among different banks or different types of investments.
To stay safe, that may mean an uptick in demand for US treasuries. But those are already paying close to zero. A big influx in demand could push rates below zero. It could also mean bank runs as depositors move their emergency cash our of bank accounts.
For compliance that means a new task of keeping cash investments within permitted investments, monitoring risk, and securities trades.
This week, Senator Reid introduced S.3637 — To temporarily extend the transaction account guarantee program, and for other purposes. There is no indication how well this will do in the lame duck Congress. Failure to extend the program will clearly inject more risk into the financial services sector at a time when risk is a four letter word.