There's been some activity recently related to "amalgamated" FDIC-insurance bank deposit products. Reich & Tang, one of the players in the space, will be spinning itself off of its parent company, Natixis Global Asset Management, the firm confirmed recently in a press release, "Reich & Tang Announces Management Buyout Agreement. Reich & Tang exited the money fund business earlier this year when it sold the business to Federated, citing the challenging regulatory environment for money funds. (See our News, Federated Finalizes Deal with R&T). Instead, the company will focus on growing its FDIC-insured deposit program and it believes this buyout will help them do that. Another player in the "structured" FDIC-insured bank deposit space, TCG Financial, was acquired by alternative mutual fund company, Catalyst Funds, just this week. We examine the two deals and report on the FDIC's 2Q "Quarterly Banking Profile" below.
The Reich & Tang press release says, "As of August 12, 2015, the ownership of Reich & Tang transitioned from being a wholly owned subsidiary of Natixis to a privately held partnership/ownership structure of several key persons at the firm, all of whom are longstanding Reich & Tang executives. Michael Lydon will maintain his role as President and Chief Executive Officer and oversee the organization."
Lydon comments, "Reich & Tang began its longstanding business in 1974 as a privately held company, which is strategically where we have decided to return it. Having recently liquidated our money fund business we believe that the new structure fosters a leaner, more nimble, and keenly focused organization that will carry forward Reich & Tang's stellar reputation in product innovation and superior client service in the many markets it serves. This is an opportunity for Reich & Tang to grow as a major provider of FDIC programs rather than as a smaller money fund provider facing an uncertain regulatory landscape."
The release says, "All of Reich & Tang’s infrastructure remains unchanged (IT, operating systems, sales, marketing, service, finance, etc.) and will continue to operate business as usual." Lydon adds, "Our focus is on growing our FDIC insured investment solutions and bank funding programs. FDIC programs continue to be in high demand as money market mutual fund reform takes hold and diminishes the allure of money funds for many intermediaries and investors."
Amalgamated FDIC-insurance products invest in a series of electronically linked bank deposit accounts, which allows investor to virtually insure millions with FDIC insurance. 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. According to the 2015 AFP Liquidity Survey, 24% of corporate treasurers use these products to invest in bank deposits, down from 26% in 2014.
TCG Financial Services tried to put a new twist on this space last September when it announced the launch of money funds that invest in FDIC-insured deposits. (See our Sept. 12 News, "TCG Launches Govt MMFs With FDIC Insured Blocks.") Earlier this week, website FIN Alternatives reported, "Catalyst Funds Acquires TCG Financial Series Trust Money Funds." The release says, "Liquid alternative mutual fund specialist Catalyst Funds has acquired the TCG Financial Series Trust funds, a group of 10 alternative money market funds that invest primarily in bank deposits. The TCG funds generally offer a higher yield than traditional money market funds, as well as FDIC insurance for the funds’ investors [sic]. They will initially only be offered to institutional investors. Terms of the acquisition were not disclosed."
The SEC filing says, "Effective September 3, 2015, Catalyst Capital Advisors LLC ("Catalyst") replaced TCG Financial Services, LLC ("TCG") as investment advisor of the Fund. Accordingly, all references to TCG are hereby replaced with Catalyst."
TGC initially filed for 10 FDIC-insured institutional funds: TCG Cash Reserves MMF (CRIXX), TCG Daily Liquidity Government Money Market Fund (DLIXX), TCG Liquid Assets Government Money Market Fund (LSIXX), TCG Liquidity Plus Government Money Market Fund (LPIXX), TCG US Government Advantage Money Market Fund (GAIXX), TCG US Government Primary Liquidity Money Market Fund (GQIXX ), TCG US Government Max Money Market Fund (GXIXX ), TCG US Government Premier Money Market Fund (GRIXX ), TCG US Government Select Money Market Fund (GLIXX), and TCG US Government Ultra Money Market Fund (GUIXX). The funds have yet to gain more than minimal seed money in assets though (and are not tracked by Crane Data).
In other news, the FDIC's "Quarterly Banking Profile, Second Quarter 2015” says, “Total deposit balances fell by $25.8 billion (0.2 percent), as at least one large bank reduced its non-operational deposits (wholesale funds in excess of the level needed to provide operational services to wholesale customers) to avoid a regulatory capital surcharge. Deposits in foreign offices declined by $34.1 billion (2.5 percent), and domestic office deposits rose by $8.3 billion (0.1 percent). Domestic deposits in interest-bearing accounts fell by $37.1 billion (0.5 percent), while noninterest-bearing deposits increased by $45.4 billion (1.5 percent). Nondeposit liabilities declined by $34.1 billion, as trading liabilities fell by $57.9 billion (18.9 percent)."
JPM Securities' weekly "Short Term Market Outlook and Strategy" also mentions deposits, writing, “While we believe a large portion of the displaced money will rotate into government MMFs, up until now, this has not been the case. In fact, government MMF’s assets under management are down $36bn in 1H15, consistent with seasonal outflows typical this time of year. Instead, based on the most recent quarterly FFIEC data, so far, the deposit shift has largely stayed within the banking system, rotating from large banks to mid-sized institutions. [B]anks with assets greater than $250bn saw their total deposit balances fall by $71bn quarter-over-quarter. However, nearly 60% of that was absorbed by banks with assets between $50bn and $250bn. Unlike large financial institutions that face significant capital and liquidity costs, mid-size banks are less impacted (both because they face less stringent regulations, their business models are less complex, as well as the fact their regulatory implementation date is usually later than US G-SIBs'), allowing them to gain market share to the extent possible."
They continue, "Looking ahead, as banks continue to optimize their balance sheets to comply in the new regulatory regime, more deposits are expected to be removed. While the initial shift has been towards smaller banks, we believe eventually these deposits will be funneled into the money markets, either through sweep accounts, government MMFs, and/or bills. The magnitude and pace of this shift will depend on a variety of factors – one of which is how long mid-sized institutions are willing to sustain a low return on assets (ROA) for those non-operational deposits.... Given the Fed's message that the pace of tightening will likely be a very gradual one, it may not be long before bank equity shareholders pressure management to increase their ROAs. When that happens, we believe those deposits will likely find their way into the money markets."
