Watch for the February issue of our Money Fund Intelligence to come out later this morning along with performance information from Jan. 31, 2011, and "shadow" NAV information from Nov. 30, 2010.... On Friday, Fixed-Income Strategist Garret Sloan of Wells Fargo Securities wrote, "Monday will be a watershed moment in the U.S. banking system if the FDIC comes out with its final recommendation for deposit insurance assessments. The structure and magnitude of the assessment could dramatically change the way that banks pay for depositor protection. The preliminary FDIC model shows that the new assessment will be a very holistic way of treating bank depositor risk by considering both the asset and liability side of the balance sheet rather than simply charging a flat fee on total domestic deposits. The change could cause some relatively significant short-term market changes."
He explains, "First, there is the possibility that depositors will begin assessing the relative riskiness of their banks based on the relative magnitude of FDIC insurance premiums. The result could potentially entice risk-averse depositors to move assets to banks they consider less risky (i.e. lower FDIC assessment per dollar of deposits). A second potential outcome may be the movement of capital out of banks and into money funds, separate accounts and direct investments where FDIC insurance fees are not levied. The assessment raises the potential that both earnings credits and interest paid on money market deposit accounts and offshore deposits could decline in order to compensate banks for additional FDIC premiums."
Sloan continues, "A third potential outcome may be a change in the competitive fee landscape. Each bank will likely be required to strategically determine their relative pricing power in passing on new fees to clients. In that discussion the ability to justify charging higher credit spreads to make up for depositor insurance will need to be addressed. But the corollary to this argument is how a bank justifies charging higher depositor fees to clients because the asset side of the bank's balance sheet is relatively more risky according to the FDIC model. The holistic approach from the FDIC seems to leave all of these alternatives on the table. In short, the potential for banking to become more expensive on both the transaction and credit extension side is possible."
Finally, he says, "A fourth potential outcome is the way in which banks fund themselves. The current proposal from the FDIC would assess fees at the IDI (Insured Depository Institution) level. Some institutions that conduct repo transactions out of the bank may look to curtail sources of funding that pledge specific assets ahead of depositors in a wind-down situation. Such sources of funding in the preliminary FDIC model would likely raise assessment fees -- all else equal. The result could likely be a decrease in bank repo, or at least GC repo rates and a potential uptick in Fed funds market activity."
