LAKE BLUFF, Ill.-While most of the attention last week was on how credit unions helped to kill in Congress any extension of the Transaction Account Guarantee (TAG) program, which expires at the end of the year, there was less attention being paid to how it creates the potential for billions of dollars of checking deposits to be on the move.
But just how much of those funds might move is debatable, with sources disagreeing on what the real effects would be on financial institutions and credit unions from TAG's expiration.
Two industry experts see little impact on credit unions, while another predicts potential challenges should credit unions not react. Michael Moebs, economist and CEO at Moebs $ervices, told Credit Union Journal that beginning Jan. 1, about $400 billion in checking deposits could be at risk, estimating $400 million to be CUs' share of these funds.
Effective Jan. 1, legislation that created unlimited deposit insurance from the NCUSIF and from the Deposit Insurance Fund for non-interest-bearing checking accounts will expire, per Dodd-Frank guidelines, rolling back coverage to $250,000 per account.
The additional coverage was established under the Troubled Asset Relief Program (TARP) largely to protect the funds-and payrolls-of businesses, noted Moebs, who pointed out there are more total checking account dollars on deposit today ($1.3 trillion) than at any time in U.S. history. About two-thirds of the deposits are in non-interest-bearing DDAs, he said.
Checking Growth To Continue
"While there may be some movement in checking account funds when deposit insurance coverages change, I do not believe it will be significant because most investors with large amounts of money are more concerned about the earnings on those dollars than they are for the need of deposit insurance," said Dennis Dollar, principal with Birmingham, Ala.-based Dollar Associates. "In fact, most businesses in America are small businesses that do not keep in excess of $250,000 in their checking accounts."
Dollar posited that if deposit insurance was the primary preference for huge-dollar investors, there would be no money in the stock market or mutual funds. He also pointed to the tremendous growth in checking account deposits at CUs over the past two years. "I personally believe this post Bank Transfer Day momentum will continue for credit unions and will offset what little, if any, checking account transfers that may come from that small number of big-money investors who value deposit insurance over return on investment."
Bill Hampel, CUNA chief economist, agrees with Dollar. "For the vast majority of the owners of these deposits, the existence of the extra insurance is not likely to be that important. We are no longer in the midst of a worsening financial crisis, which was the case when the Transaction Account Guarantee Program was created."
Hampel pointed to the fact CU members currently hold $37.5 billion in uninsured shares and deposits in interest-earning accounts over the $250,000 threshold. "If members already have enough confidence to hold $37.5 billion in uninsured accounts in credit unions, it's very unlikely that the owners of the non-interest bearing deposits over $250,000 will flee once the insurance coverage is reduced to $250,000 per account."
A More Cautious View
Moebs believes that should TAG sunset on Jan. 1, many people with non-interest-bearing checking accounts with more than $250,000 on deposit will move their money quickly. Moebs' data indicates that, conservatively, total dollars from each of these accounts above the standard $250,000 insurance maximum is $400 billion.
"This will be like a pebble dropped into the middle of a pond," offered Moebs. "The ripple effects will be felt throughout the deposit side of the business and carry over to the asset side, as well, and will last for three months if not the first two quarters."
Moebs says that the mega-banks and money market mutual funds-led by the Merrill Lynch Cash Management Account and the Schwab checking account-have their sights on this money and have been targeting customers for many months. "The mega-banks and money market mutual funds don't want the small guy anymore. They want someone they can build a big relationship with."
'Can't Afford To Lose Funds'
Moebs believes that if the expiration of TAG is felt, it will be by CUs above $100 million in assets. "However, no Main Street institution, not a community bank nor a credit union, can afford to lose this money. Checking is the primary financial service and they need to keep the money because they are not paying any interest on it. It helps them keep their expenses down."
Every credit union in the country, insisted Moebs, should have a list of every member who has more than $250,000 in their checking account and be prepared to contact them personally to discuss the issue.