With the European banking system tottering on the brink of collapse, nervous holders of cash have flooded the U.S. banking system with $1.2 trillion of deposits. Panicky holders of large amounts of cash are taking advantage of a provision of the Dodd-Frank Act that provides unlimited FDIC insurance coverage on noninterest-bearing transaction accounts.
The Dodd-Frank Act provides unlimited deposit insurance coverage regardless of the account balance or type of ownership. The unlimited insurance is temporary and is due to expire on December 31, 2012.
As of June 30, 2011, FDIC insured institutions held $1.9 trillion of noninterest-bearing deposits of which $1.2 trillion was in noninterest-bearing transaction accounts larger than $250,000. The money flooding into the U.S. banking system seeking a safe harbor is from sophisticated investors who are justifiably seeking to protect themselves from losses.
After the near total meltdown of the financial system in 2008, investors are taking steps to move their money into government guaranteed accounts. The revelation that money market funds run by Fidelity and Vanguard had a significant portion of their assets invested in European bank debt contributed to the deposit surge into U.S. banks.
During the second quarter of the year, deposits into FDIC insured noninterest-bearing accounts increased by $153.8 billion or 17.2%. Given the collapse of equity markets that began in August and the worsening European debt crisis, deposits into U.S. banks during the third quarter are likely to surge.
Normally banks would love to have interest free money but these are not normal times. The money flooding in today can leave just as quickly which limits bank investments to very short term instruments. Since the Federal Reserve has forced interest rates to zero on the short end, banks are actually charging fees to accept large deposits to offset the FDIC deposit insurance assessment fees.
Depositors are so worried about the safety of their money, they are willing to pay the banks to hold their money. The banks, unable to profitably invest the funds, would just as soon not take the deposits.
The amount of deposits insured by the FDIC has surged since last year. For the quarter ending June 20, 2011, the FDIC insured deposits of $6.54 trillion, up 20.7% from $5.42 trillion at September 30, 2010. Backing up the FDIC insurance coverage of $6.54 trillion of deposits is the FDIC Deposit Insurance Fund which has a balance of only $3.9 billion for a reserve ratio of a minuscule 0.06%. Not exacting a reassuring amount of protection as we appear to be sliding towards a financial crisis that could be multiple times worse than 2008.