The Pending Expiration of Unlimited Deposit Insurance Coverage

The Pending Expiration of Unlimited Deposit Insurance Coverage
During the 1930s, Congress created the FDIC specifically to restore depositor confidence and financial stability to the nation’s banking system. The FDIC is an independent agency of the US government that protects
the funds depositors place in banks and savings institutions. The standard insurance amount is $250,000 per
depositor, per insured bank, for each account ownership category.
In order to restore market confidence and to eliminate disruptive shifts in deposit funding in the banking
system, the FDIC implemented the Transaction Account Guarantee Program (TAGP), under the Temporary
Liquidity Guarantee Program (TLGP) in October 2008. Initially, the TAGP fully guaranteed all domestic noninterest-bearing transaction deposits held at participating institutions through December 31, 2009. This
deadline was later extended through December 31, 2010. All FDIC-insured institutions were eligible to participate and users were initially assessed a flat-rate annual fee of 10 basis points (bps). The fees for TAGP were
increased during the extension period to a risk-based system with an assessment rate of 15, 20, or 25 bps
depending on the institution’s deposit insurance assessment category. By the December 31, 2010 expiration,
the FDIC had collected a total of $1.1 billion in fees.
In July 2010, President Barack Obama signed into law a final version of the Dodd-Frank Act. Section 343 of
the Act provides for unlimited deposit insurance coverage for noninterest-bearing transaction accounts at
all FDIC-insured depository institutions (“Dodd-Frank Deposit Insurance Provision”). A key difference between the Dodd-Frank Deposit Insurance Provision and the expired TAGP is that the FDIC does not charge
a separate assessment for the insurance of eligible accounts under the provision.
Unlimited FDIC Insurance Set to Expire at Year End
December 31, 2012 will see the expiration of unlimited FDIC insurance on noninterest-bearing transaction accounts. Policymakers could act to extend the Dodd-Frank Deposit Insurance Provision. However, this
would require Congressional approval. With the pending November election and split control of the House
and Senate, many market participants view this as an unlikely outcome. If nothing is done, the unlimited
insurance would simply lapse and coverage would revert to the standard $250,000 limit.
Reallocation of Cash Balances
Should the unlimited FDIC insurance expire, approximately $1.4 trillion in deposits would be affected. Investors will need to accept that the majority of their bank deposits will be converted from government credit
risk to unsecured bank credit risk or contemplate moving thier deposit balances to alternative investments.
The 2012 AFP Liquidity Survey2 suggests that two out of five respondents may diversify their organization’s
holdings by reducing their investment in noninterest bearing accounts. With the pending expiration, investors may choose to be proactive and reevaluate their investment allocations before the insurance expiration.
Alternative investment options may include, but are not limited to:
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recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or
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The Pending Expiration of Unlimited Federal Deposit Insurance Coverage
Maintaining or reallocating uninsured deposit balances among the banks
Diversifying deposit accounts at various banks while keeping account balances below the $250,000
insurance limit
Directly investing in short-term securities
Purchasing shares of money market mutual funds
Impact on Short-Term Yields
If indeed the end of unlimited insurance does occur, we expect to see portfolio diversification with a shift
away from large unsecured deposit concentrations. To some extent, monies will either flow back into direct
investments or into money market funds. As this rebalancing may take a period of time, especially as we
approach year-end, increased demand for short-term securities coupled with limited supply will further
contribute to downward pressure on yields.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset Management. Information contained
herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject
to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset Management may have a position in the securities
mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness
having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Limitada is authorized and regulated by Comissão de Valores Mobiliários and Banco Central do Brasil. Western Asset Management
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Western Asset
October 2012
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