(Refiles to correct word order in second paragraph. The author
is a Reuters Breakingviews columnist. The opinions expressed are
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
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
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
-- 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
-- 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
Bigger can be badder [ID:nN1E77M1DQ]
-- For previous columns by the author, Reuters
customers can click on [CRANE/]
(Editing by Richard Beales and Martin Langfield)
Keywords: BREAKINGVIEWS BANKS/DEPOSITS
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