$1.2 Trillion Of Nervous Money Floods Into U.S. Banking System

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.


  1. Opinion: Cobra’s Kluga Sounds Off on Obama’s Economic Plan

    Published September 12, 2011
    Categories: Economy
    In a commentary on President Obama’s plan to boost economic growth and job creation, Cobra Capital president Dale Kluga notes that as a national finance business reliant upon the success of small business clients, “we should expect one thing to definitely occur as a result of Obama’s American Jobs Act – more cash hoarding.”

    “As a national finance biz that relies on the success of other small biz clients, we expect one thing to definitely occur as a result of Obama’s AJA – more cash hoarding.

    Not just by the big zombie banks that continue to issue toxic credit cards and falsely claim they are lending fairly to small biz. No, this time the zombie cash hoarding disease will now permanently infect our most important job machine – our small businesses.

    President Obama is entirely disconnected from the one source of jobs that can revive his re-election hopes. We small biz remain in a severe liquidity crisis and need more fair credit terms from banks just to survive, let alone thrive. Payroll tax cuts don’t cure small biz liquidity problems – fair and reasonable traditional bank credit does.

    Small biz owners are simply trying to survive in this terrible economy. The President’s speech did nothing to give us the hope or confidence we need to start hiring. His solutions do nothing to overcome our economy’s structural problems; he continues to apply temporary, cyclical solutions that have no effect on our confidence in this economy or his administration.

    Too bad he learned far too late that he helped bail out the wrong industry – Wall Street over Main Street. Now it is far too late to provide any permanent solution to our jobs producing small biz, even if he wanted to.

    All this means is that our small biz clients will continue to hunker down and hoard what little cash they may have left as their home equity lines of credit remained fully tapped out and on the verge of imminent default. Even the toxic credit cards issued by the big banks will fade as small biz start defaulting that toxic credit product of last resort.

    The American Jobs Act will become yet another meaningless program that fails to connect with the current critical real need of small biz – fair and traditional credit solutions.” Dale Kluga, president, Cobra Capital

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