Big Depositors Seek a New Safety Net

Big Depositors Seek a New Safety Net

On the first day of the New Year, $ 1.5 trillion of bank deposits will 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 that are willing to forgo any interest in order to have immediate access to their large pools of cash.

These accounts hold about 20 percent of all deposits in United States banks. Starting Jan. 1, only $ 250,000 in each noninterest bearing account will be backed by the Federal Deposit Insurance Corporation.

Now a scramble is under way to make sure these customers do not withdraw 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 had 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. “Interest has picked up dramatically,” said Joshua Siegel, managing principal of StoneCastle.

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 small banks, there are programs like Reich & Tang’s, with the government fully insuring the scattered deposits. 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.

“Implicitly or explicitly, most of this money is going to still be guaranteed,” said Bruce Hinkle, an executive with Farin & Associates, a consulting firm that works with banks.

The unlimited guarantee was created in the depths of the crisis by the Federal Deposit Insurance Corporation, in order to stop a migration of customers from smaller banks to larger ones that were viewed as less likely to fail.

Most individual savers keep their money in interest-bearing accounts, where since the crisis the insurance coverage was raised to $ 250,000 from $ 100,000. Some families have gotten around the insurance limit by dividing money into separate $ 250,000 accounts under the names of different family members.

Firms like Reich & Tang will do this more systematically for wealthy clients. The end of the unlimited guarantee for corporate and municipal depositors is set to significantly increase business at these firms.

Mr. Siegel, managing principal of StoneCastle, which runs one of the largest programs, said he had seen a tenfold increase in interest from community banks in the last month. Begun in 2011, the service, called the Federally Insured Cash Account program, distributes large deposits throughout a network of roughly 500 banks.

StoneCastle and other firms make money by charging banks a small percentage of any deposits they distribute, generally less than 0.2 percent.

Frederick L. Cannon, a bank analyst at Keefe Bruyette & Woods, says that the expansion of the practice from wealthy individuals to corporate customers makes the F.D.I.C.’s limits toothless and exposes the government to more risk if banks fail in the future.

“You want these limits so there is some kind of market discipline on these banks,” said Mr. Cannon. “If I were on the F.D.I.C. board, I would be concerned about this.”

This article has been revised to reflect the following correction:

Correction: December 30, 2012

An earlier version of this article misidentified the federal insurer of bank deposits. It is the Federal Deposit Insurance Corporation, not the Federal Deposit Insurance Company.


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