NEW YORK--()--The use of programs that pool Federal Deposit Insurance Corporation -insured bank deposits will likely grow this year, according to Fitch Ratings. These programs offer government guarantees on large dollar deposits by splitting them into smaller deposits among a large number of participating banks, therefore qualifying for Federal Deposit Insurance Corporation (FDIC) protection.
Institutions participating in these programs could be national association banks, but are mostly small local banks with a limited depositor base and constrained access to the capital markets, thus presenting credit risk to which investors have to be mindful.
Fitch believes that bank failure remains the primary risk. According to the FDIC data, 51 U.S. banks failed in 2012. Should a program member bank fail, the deposit obligations are expected to be transferred to a healthy institution by the FDIC. If the FDIC is unable to find such an institution, it will arrange for payments of the insured principal and accrued interest to the failed bank's depositors in a few days. However, the money may not be immediately available exposing investors to payment delays.
Nonetheless, providing both meaningful safety and yield, these programs remain attractive facilities for conservative investors. For example, both the Certificate of Deposit Account Registry Service and the Federally Insured Cash Account offer full FDIC insurance coverage and yield in excess of the U.S. Treasury rate of comparable maturity. There are other programs that offer similar services.
Among conservative investors, local government investment officers may increase their allocations to these programs, according to one Fitch-rated government investment pool. With the expiration of the Transaction Account Guarantee program on Dec. 31, 2012 (which provided an unlimited FDIC insurance for non-interest bearing deposits), this pool increased its allocations to both programs to nearly 13% of its portfolio in December 2012 from just under 3% a year ago.
For more information on local government pools' investments, see Fitch's credit reports available at www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.