While many predict that as much as $500 billion could flow out of bank deposits due to pending bank reforms, so far that has not been the case. The FDIC's "Quarterly Banking Profile, First Quarter 2015" shows that total deposits increased by $194.4 billion (1.7 percent) in the first quarter of this year. Domestic office deposits rose by $210.2 billion, while deposits in foreign offices declined by $15.8 billion. Deposits in accounts of less than $250,000, which typically experience strong growth in first quarters, increased by $110.4 billion, while balances in larger-denomination accounts, which usually have little or no growth in first quarters, rose by $104.1 billion. The average net interest margin (NIM) fell to 3.02 percent, from 3.16 percent a year earlier. Fewer than half of all banks -- 43.2 percent -- reported year-over-year improvement in their quarterly NIMs. We examine JP Morgan Securities Strategist Alex Roever's take on the report, and look at the growth of "amalgamated" FDIC-insured products below.
In JPM Securities' weekly "Short Term Market Outlook and Strategy," Roever writes, "This past Wednesday, the FDIC released its latest Quarterly Banking Profile (QBP) for 1Q15, providing us with insight into how regulations are impacting banks. As we noted in our 1Q15 Regulatory Update, this past quarter marked the beginning of some key regulations going into effect. Large US banks began complying with certain minimum capital requirements, publically disclosing their Supplementary Leverage Ratios, and maintaining a Liquidity Coverage Ratio of at least 80% of the target. For their part, their balance sheets have steadily evolved over the past couple of years in preparation for this. But more recently, we are starting to see a moderation in their regulatory driven activities. This dynamic was evident in the latest QBP."
Roever adds, "[M]id-sized financial institutions (assets between $50-$250bn) seem to be picking up the slack large banks are leaving behind. By design, they are less impacted by the macroprudential regulations as policymakers view them as less risky, less levered and less systemic. As a result, mid-sized institutions have been able to absorb what has been pushed out of large banks. This was particularly evident in 1Q15 when deposits and loans of mid-sized banks grew by $118bn and $94bn respectively."
As we wrote in the April issue our Money Fund Intelligence newsletter ("Deposits, FDIC 'Amalgamators' Growing; Going Institutional), zero yields and the expiration of unlimited FDIC insurance haven't stopped the growth of bank deposits -- deposits have increased by almost $1.6 trillion the past 3 years. Bank and thrift money market deposit and savings accounts combined have almost doubled since the financial crisis hit hardest in late 2008; they now total a massive $7.65 trillion. One of the factors driving this spectacular increase is the rapid growth of FDIC insurance "amalgamators," who are in the business of breaking too-big-for insurance deposits into smaller FDIC insured pieces (spreading them among a network of banks). This segment continues to grow via brokerage sweeps, and it is also now seeing growth from the institutional and corporate cash segment.
While no hard numbers are available, these two segments combined likely total over $600 billion. Both sides should continue to see gains due to pending money fund and bank regulatory reforms (though higher rates could start siphoning off assets). The sector also made news two months ago with Reich & Tang's exit from the money fund business, as well as from money fund portal ICD's announcement that it will offer a “structured FDIC product, StoneCastle Cash Management’s Federally Insured Cash Account, or FICA. We review these below.
Promontory Interfinancial Network pioneered the concept of breaking large deposits into smaller insured pieces with its CDARS (Certificate of Deposit Account Registry Service) product, and been offering its IND (Insured Network Deposits) solution for brokerages and its ICS (Insured Cash Solutions) for money market deposit accounts. A number of brokerages use IND and other products in order to offer FDIC insurance for accounts of $1 million or more.
As previously mentioned, Reich & Tang announced that it is liquidating its $10.9 billion in money market funds to "focus on growing its successful FDIC-insured deposit programs." CEO Michael Lydon commented at the time, "The company was built on its expertise in cash management and this fine-tuning of our product line is a direct result of our ability to adapt our business to meet the needs of our customer base. This foundation of more than 40 years' experience has helped us to uncover further opportunities to grow relationships through our leading FDIC-insured sweep and funding programs, areas that will be our focus going forward."
Among the major players in the brokerage sweep market for FDIC insured products are the aforementioned Reich & Tang, as well as Promontory Interfinancial Network, Deutsche Bank, and Total Bank Solutions. (Dreyfus' Pershing clearing platform offers a number of different programs too.) How do these "amalgamated" FDIC-insured offerings work? They invest in a series of electronically linked bank deposit accounts, which allows the investor to enhance the amount of FDIC insurance that one can obtain. Each bank can offer $250K in FDIC insurance at one bank, but through some of these offerings an investor can get FDIC insurance at much higher levels. New institutional offerings are pushing the limits toward $20 million or higher, by accessing many of the more than 7,000 banks across the country. Liquidity though, is often limited to once-a-week or twice weekly withdrawals.
According to the Association for Financial Professionals' 2014 AFP Liquidity Survey, 26% of organizations that maintain cash and short-term investment holdings at banks used "structured" FDIC-insured products to invest in bank deposits last year, up from 24% in 2013. Advocates say that the products offer safety and liquidity with slightly higher returns. (Watch for results from the new AFP Liquidity Survey to be released later this month's at our Money Fund Symposium in Minneapolis June 24-26.)
"The space is expanding. It's no longer just a few players. New entrants are coming in, and there's probably going to be more as investors look for alternatives to money market funds," says Eric Lansky, President, StoneCastle Cash Management. New entrants include Wertz York, Insured Deposit Portal, American Deposit Management, Anova Financial, and TCG Financial Services.
In April, online money fund trading "portal" Institutional Cash Distributors announced that it will distribute StoneCastle's FICA product through its platform. Jeff Jellison, ICD CEO Americas said, "Basel III regulations and future MMF reform are pushing corporate treasury to broaden their asset allocation strategies. StoneCastle's FICA product is an excellent product addition as it enables institutions to have the ability to enhance their overall portfolio return while reducing risk and providing twice weekly liquidity."
Lansky commented, "We are excited to have StoneCastle's FICA product available on the ICD Portal. Bringing the leading FDIC insured cash solution to one of the world's largest portals ensures all treasurers have the opportunity to safely enhance the yield of their cash without liquidity restrictions associated with a term product <b:>`_." StoneCastle's FICA program, which launched in 2009, recently broke above $8 billion in assets under management. "Our priority is to deliver as best a yield and as high a level of capacity as possible," says Lansky.
