Remember “too big to fail?” Well, the next financial crisis will eclipse that.
Shah Gilani writes: Everyone is afraid of falling off the “fiscal cliff.” But there’s another dangerous countdown clock about hit to zero and no one is talking about it, even though it will spell even more financial problems for us all. At midnight on December 31, 2012, the Transaction Account Guarantee (TAG) program will expire.
The TAG program was initiated at the height of the credit crisis when depositors were fleeing banks for fear they would go under.
To quell what was turning into a run on banks, the FDIC upped regular deposit insurance from $100,000 to $250,000 and under the TAG banner initiated unlimited insurance for all non-interest bearing transaction accounts.
It’s the second part that’s important because that’s the piece that will soon come to an end.
When the unlimited insurance expires, corporations, businesses and depositors — whose soon- to- be- uninsured deposits, which total some $1.4 trillion, are likely to flee smaller banks — will rush into money market funds and seek the safety of short-term U.S. Treasuries.
This will create serious negative repercussions affecting our economic future.
The Unseen Perils at the Bottom of This Cliff
Here’s how each of those actions will affect the economy and you personally.
First, the too-big-to-fail (TBTF) banks that created the credit crisis and spawned the Great Recession are much bigger now than they were in 2008, and are about to get even bigger.
Because the failure of any one of America’s big five banks would implode the global financial system, they will never be allowed to fail. That makes them a fortress for depositors, regardless of expiring guarantees.
The same isn’t true for the smaller banks that will start disappearing.
U.S. corporations are sitting on at least $1.75 trillion in cash. Most of those funds are being held in checking and transaction accounts.
When the unlimited insurance on their deposits expires they will move some of their money elsewhere. But, on account of large payroll and other transaction account services corporations are reliant upon, a lot of that cash will still be parked at the biggest banks.
Cash on deposit at other institutions, greater than what will be insured, which is $250,000 since that higher insurance guarantee was made permanent, will gravitate to the big banks because of their fortress status.
But, it’s not just big corporations that will park their money at big banks. Most other businesses that have transaction accounts with balances above the covered $250,000 limit will start moving their accounts to the TBTF banks for the exact same reason.
The problem for the economy is that TBTF banks are going to have to make bigger and bigger loans and orchestrate far-reaching lending schemes that encompass wide swaths of the population (as they did with mortgages) to accommodate the greater economies of scale their huge size demands. That’s going to lead to massive concentrations of risk, which the TBTF banks have proven has been, and will be, their downfall.
Personally, for you and me as small consumers of banking services, there will be less competition, and borrowing and transaction costs will rise.