Today, $1.5 trillion of bank deposits lose an unlimited government guarantee that was granted during the financial crisis to assure skittish customers that their cash was safe. For a handful of boutique firms that service banks, it's a boon for business.
The accounts losing the insurance are used by businesses, municipalities and other entities like nonprofits willing to forgo any interest to have immediate access to their large pools of cash. These accounts hold about 20 percent of all deposits in U.S. banks. Starting today, only $250,000 in each noninterest-bearing account will be backed by the Federal Deposit Insurance Corp.
Now a scramble is under way to make sure these customers do not pull large sums out of banks, particularly community banks that have benefited from the guarantee. Because a depositor is barred from spreading out $1 million into four accounts within the same bank, many smaller banks are turning to a handful of specialized cash-management firms that can split up deposits into multiple $250,000 chunks and distribute them among a network of banks, each of which can insure $250,000.
One firm doing this parceling work, Reich & Tang, has seen an influx of 25 new banks in the last few weeks sign up for the program, a 20 percent growth. Deposits managed by another firm, StoneCastle Cash Management, have surged to roughly $3 billion from just over $2 billion in September.
The end of the unlimited insurance, known as the Transaction Account Guarantee, is the latest twist in the government's effort to scale back its support for the financial system, and the banking industry's effort to mute the impact of the new lower limits. Many analysts assume that even with the end of the government guarantee, the vast majority of the deposits will remain in the banks because the government will continue serving as some sort of backstop for most of the $1.5 trillion.
For the nation's largest banks, there is a widely shared assumption that the government would be forced to provide a backstop to protect depositors in a crisis, as it did in 2008.