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Starting Jan. 1, investment managers will need to rethink how they allocate their associations' funds. Unlimited FDIC insurance for noninterest-bearing accounts, which began in 2008 under the Trans- action Account Guarantee (TAG) program, is set to expire and leaves associations without a comparable – i.e. limitless, liquid and guaranteed safe – place to park their cash.
There are still many other options open to associations. Demand deposit accounts are a good alternative in the current depressed rate environment. They offer a superior “earnings credit rate,” which offsets cash management fees and generally pays a higher rate than what an association would earn in actual interest in an interest-bearing account. Depending on the level of balances maintained, ECRs can even offset all cash management fees.
Overnight repurchase agreements are another option. They offer security since they are collateralized with Treasury bills. In recent years, overnights were often overlooked due to low interest yields, yet this point is moot when compared to noninterest-bearing accounts. Treasury obligations funds are another safe alternative, though they are also low-yield. In addition, other associations may have the same strategy: the popularity of Treasury obligations post-TAG expiration may mean limited availability.
Of course, no bank offers unlimited protection, though a bank's corporate debt rating and general size may offer solace. A bank’s corporate short-term debt rating will typically be listed on its website in the “investor relations” section. And of course, you can just ask your bank to disclose their rating.
Transitioning to a money market account offered by an investment house is also a possibility for associations looking for safe alternatives, assuming the securities underlying the money market meet the association’s investment policy. No doubt this is a popular option, as it offers commensurate stability as mutual funds strive not to “break the buck.” Even so, treasurers may be advised to research whether the number of outbound transactions from these accounts is capped, which may reduce cash management flexibility. Money market mutual funds may also be subject to significant reform over the next year, though efforts from the SEC and Federal Stability Oversight Council stalled earlier in 2012.
A laddered CD strategy is also a possibility. Buying multiple CDs from multiple banks allows a CFO to keep all of their money protected under the new FDIC rules. One under-discussed strategy is simply keeping funds in the same noninterest-bearing demand deposit account a treasurer has created already, as mentioned above, even without unlimited FDIC insurance. Congress may extend TAG for these accounts or create a gradual step-down to limited insurance, as advocated by former FDIC chair Sheila Bair. Further, the accounts maintain the liquidity associations seek and ECRs may also reduce cost of bank services.
Congress may extend or modify the TAG program before expiration, but the pending deadline, coupled with uncertainty surrounding the implications of “fiscal cliff” negotiations, means stewards of an association's treasury will be looking for alternatives in the short term. As association’s CEOs and CFOs know too well, decisions to store cash must be made in line with the organization's investment policy, which was not a major concern before TAG's expiration. Moreover, this investment shift may not be seen as a “new normal,” but rather a system returning to status quo after a challenging five years.
Lenahan is commercial team leader for TD Bank. Contact her at 301- 289-3593 or firstname.lastname@example.org.