Regular readers know that there was absolutely no reason to believe that the Financial-Academic-Regulatory Complex's (FARC) embrace of the Japanese model would work. It has a history of long-term failure. Just look at Japan.
By asking Congress to extend insurance on all deposits, banks are saying that the opacity that made it impossible to tell which banks were solvent and which were not at the beginning of the financial crisis is still with us. [Something that we also knew because the interbank lending market is frozen.]
It is this opacity that causes problems for the banks.
Bankers realize that large depositors are not fooled by the stress tests and meaningless bank capital ratios. Neither of these has prevented banks in the EU from having to be closed.
Bankers realize that large depositors do not trust them after the Libor scandal showed that the bankers were willing to lie for profit or to present their institution in a more favorable light.
The bottom line is that bankers realize that large depositors are not going to keep their deposits in the bank if they cannot independently assess its solvency and understand their risk of loss unless the government insures that the depositors will not lose money.
The expiration of special U.S. deposit insurance at the end of the year has spurred banks to lobby Congress to extend the program out of fear that companies will withdraw billions of dollars.
At issue is the Transaction Account Guarantee (TAG) program, which insures all bank deposits in checking accounts above the $250,000 coverage already provided by the Federal Deposit Insurance Corp.
TAG primarily benefits businesses and local governments that need quick access to large amounts of cash for payroll and other needs.
About $1.3 trillion of TAG-insured deposits that do not pay interest sit at large and small U.S. banks.
The TAG program was created by bank regulators and the U.S. Treasury during the 2008 financial crisis to attract cash for banks and reassure depositors that their money was safe....Without this program, this $1.3 trillion in deposits would be hot money that could leave the banking system for higher returns elsewhere.
Without another extension, businesses are likely to shift their deposits to prime money-market accounts and other short-term alternatives.
"This program is the best deal around," said Robert Haas, senior treasury associate in charge of cash management and investments at the National Railroad Passenger Corp., the parent of Amtrak.
It addresses treasurers' two primary concerns: safety and a return on cash that comes from discounts banks give on other services in lieu of interest, he said.....End the program and what looked like a stable deposit base shrinks considerably.
The U.S. government is trying to exit many of the emergency financial programs set up during the crisis....The fact that the US government is still trying to exit many of its emergency financial programs is a sure sign that the policies adopted under the Japanese model have not worked.
The only way off these programs is to reintroduce transparency into the financial system and adopt the Swedish model for handling a bank solvency led financial crisis.
Many analysts shrug their shoulders at the controversy.
Big banks don't need the cash. They have fixed the liquidity problems that plagued them during the financial crisis and cannot invest or lend their excess deposits at a rate that benefits shareholders....
Bank of New York was so awash in deposits last summer that it threatened to charge companies with more than $50 million in deposits to offset the fees the bank pays to the FDIC. The bank retreated from the plan but is now considering charging European clients who are flooding it with eurodeposits, Chief Financial Officer Todd Gibbons told Reuters this month.
Noninterest-bearing client deposits at Bank of New York totaled $63 billion at the end of the second quarter - 46 percent higher than year-ago levels.If $1.3 trillion in deposits were to leave the US banking system it would send a pretty strong message to European clients that maybe the US banking system isn't the best place to park cash.