Pending Expiration of Unlimited Deposit Insurance Coverage

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					       The Pending Expiration of Unlimited Deposit Insurance Coverage


                                                  Background1
                                                  During the 1930s, Congress created the FDIC specifically to restore depositor confidence and financial stabil-
                                                  ity 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 non-
                                                  interest-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 par-
                                                  ticipate 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 be-
                                                  tween 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 transac-
                                                  tion 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. Inves-
                                                 tors 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, inves-
                                                 tors may choose to be proactive and reevaluate their investment allocations before the insurance expiration.
                                                 Alternative investment options may include, but are not limited to:


                                                 1 http://www.fdic.gov
                                                 2 http://afponline.org/liquidity

© Western Asset Management Company 2012. This publication is the property of Western Asset Management Company and is intended for the sole use of its clients, consultants, and other intended
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                                                                                    The Pending Expiration of Unlimited Federal Deposit Insurance Coverage




                                                     ƒƒ
                                                      Maintaining or reallocating uninsured deposit balances among the banks
                                                     ƒƒ
                                                      Diversifying deposit accounts at various banks while keeping account balances below the $250,000
                                                      insurance limit
                                                     ƒƒ
                                                      Directly investing in short-term securities
                                                     ƒƒ
                                                      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
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Western Asset                                                                                     2                                                                              October 2012

				
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