BREAKINGVIEWS-Too-big-to-fail U.S. banks collecting free money

Tue Jan 31, 2012 5:06am IST

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(Refiles to correct word order in second paragraph. The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Agnes T. Crane

NEW YORK, Jan 30 (Reuters Breakingviews) - Complex regulations make Jamie Dimon, JPMorgan’s (JPM.N) chief executive, bristle. They can add unnecessary extra costs. Yet the U.S. Dodd-Frank Act, passed in 2010, also has its perks for big banks. One is unlimited government backing of certain types of bank deposits. At essentially no extra cost to banks, the insurance covers interest-free accounts of the kind big clients like institutional fund managers and corporate treasurers tend to control. And it helps explain why JPMorgan and other super-sized U.S. banks are awash in the cheapest funding around.

The standard deposit insurance provided by the Federal Deposit Insurance Corp is capped at $250,000 per account. But Dodd Frank codified, at least temporarily, something the FDIC adopted in the heat of the financial crisis -- unlimited guarantees for what it calls noninterest-bearing transaction accounts. The intent was to keep businesses, which tend to use these accounts for things like payroll expenses, from bailing out of banks. It should have expired in 2009. It didn’t. Lawmakers put it in the reform law, making sure it would live on at least until the end of 2012.

Community banks pushed for the expanded insurance, but big banks have been seeing the outsized inflows. JPMorgan, for instance, saw a 49 percent jump in such accounts last year, and they reached an average balance of $337.6 billion in the fourth quarter. The cash in interest-bearing accounts, meanwhile, rose just 13 percent over the same period. Wells Fargo’s (WFC.N) noninterest-bearing accounts increased 16 percent in the first nine months of 2011, against a 1 percent uptick in deposits that earn interest. Bank of America (BAC.N) saw a similar jump in the first nine months of last year.

Because big balances tend to belong to big companies that hand them to big national or global banks, noninterest-bearing accounts are concentrated with the too-big-to-fail crowd. Deposits covered by the Dodd-Frank temporary insurance funded about 10 percent of assets at banks with balance sheets larger than $10 billion, according to FDIC data for the third quarter last year. At smaller banks, they added up to only 4 percent of assets.

Along with the provisions of Dodd-Frank, low interest rates mandated by the Federal Reserve and turmoil in Europe have conspired to make interest-free deposits surprisingly attractive to their owners. They’re not giving much up in terms of income, and the unlimited guarantee from Washington makes them as safe a place to lodge large amounts of money as any -- especially for companies and other depositors that need to keep some cash immediately accessible.

There is also limited downside for big lenders. Dodd-Frank mandated that the FDIC assess larger fees on banks with bigger balance sheets, so if higher deposit balances are part of general expansion they do cost more. And banks may cut fees on other services in lieu of paying interest to their biggest noninterest-bearing depositors. But the FDIC doesn’t distinguish between deposits subject to the standard $250,000 insurance cap and those with unlimited cover. So all else being equal, fully insured noninterest-bearing accounts with big balances are cheaper to insure per dollar than regular deposits.

The planned expiration of the FDIC guarantee at the end of 2012 raises thorny questions about what depositors will do next year. But as with tax cuts, politicians find it hard to let expanded coverage of this kind die off on schedule. The FDIC planned to end its initial temporary guarantee in 2009 and then again in 2010. Dodd-Frank kept it breathing for another two years. It would be easy to argue for another extension, especially given the concern that going back to the old system would spark destabilizing withdrawals from banks.

Before Dodd-Frank, the FDIC assessed a 10 basis point fee for its temporary unlimited backing of these accounts. Reinstating that would be a start. Another might be allowing coverage above the standard cap to be optional. Some banks might prefer that such deposits don’t become too large. But if such funding continues to pool around the nation’s largest banks, making them even larger, it is only prudent for them to pay more for unlimited government backing. After all if a big bank is ever allowed to collapse, keeping depositors whole could very easily blow through the FDIC’s very limited resources.

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CONTEXT NEWS

-- JPMorgan said in its fourth-quarter earnings report that its average noninterest-bearing deposits in the period rose nearly 50 percent from the year before to $337.6 billion. Average deposits that paid interest, meanwhile, rose 13.5 percent to $759.4 billion. Bank of America and Wells Fargo also saw outsized growth in their noninterest-bearing accounts in the first nine months of last year.

-- The U.S. Dodd-Frank reforms passed in 2010 mandated that the Federal Deposit Insurance Corp provide unlimited insurance for noninterest-bearing transactional accounts between Dec. 31, 2010 and the end of 2012. The insurance is available to all depositors. Interest-bearing accounts, meanwhile, are insured up to $250,000.

-- In the third quarter of 2011, more than half of the $2.1 trillion in insured U.S. domestic interest-free deposits were in accounts with balances exceeding $250,000, according to the FDIC. Roughly two-thirds of the $183.8 billion increase in noninterest-bearing deposits over the third quarter came from accounts larger than $250,000.

-- FDIC quarterly report: link.reuters.com/tys36s

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-- For previous columns by the author, Reuters customers can click on [CRANE/]

(Editing by Richard Beales and Martin Langfield)

((agnes.crane@thomsonreuters.com)) Keywords: BREAKINGVIEWS BANKS/DEPOSITS

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