With $1.6 Trillion In FDIC Deposit Insurance Expiring, Are Negative Bill Rates Set To Become The New Normal?

Tyler Durden's picture

As we noted on several occasions in the past ten days, as a result of QE3 and its imminent transformation to QE4, which will merely be the current monetization configuration but without the sterilization of new long-term bond purchases, the Fed's balance sheet is expected to grow by over $2 trillion in the next two years. This also means that the matched liability on the Fed's balance sheet, reserves and deposits, will grow by a like amount. So far so good. However, as Bank of America points out today, there may be a small glitch: as a reminder on December 31, 2012 expires the FDIC's unlimited insurance on noninterest-bearing transaction accounts at which point it will revert back to $250,000. Currently there is about $1.6 trillion in deposits that fall under this umbrella, or essentially the entire amount in new deposit liabilities that will have to be created as a result of QEternity. The question is what those account holders will do, and how will the exit of deposits, once those holding them realize they no longer are government credit risk and instead are unsecured bank credit risk, impact the need to ramp up deposit building. One very possible consequence: negative bill rates as far as the eye can see.

The chart below shows that notional of deposits backed by FDIC unlimited insurance:

Bank of America opines below, by first presenting the balance sheet dynamics of QE, which by now should be familiar to everyone:

QE leads to growth in bank deposits…


The expansion of the Fed’s balance sheet has important knock-on effects on the size and composition of private balance sheets. When the Fed buys securities, it credits the account of the clearing bank used by the primary dealer from whom the security is purchased with newly minted electronic money (reserves). The dealer’s balance sheet thus sees a decrease in securities holdings and an increase in deposits at its clearing bank; the clearing bank sees an increase in deposit liabilities and an increase in reserves held at the Fed; and the Fed sees an increase in reserve liabilities and an increase in securities holdings.


Who ultimately holds these bank deposits – and which banks hold the excess reserves – is determined by many subsequent transactions. But for the banking system as a whole, the Fed’s purchases force an increase in deposit liabilities (or in some cases liabilities such as repo, fed funds, CDs, etc) as well as holdings of excess reserves, all else being equal. This pattern holds true as long as the seller of securities is not a bank, in which case the bank simply swaps securities holdings for reserves without any effect on its deposit liabilities. Excess reserves stand at roughly US$1.5tn as a result of the Fed’s prior asset purchases, while banking system deposits have increased by an even larger amount since late 2008.

However, the natural growth of deposits may be impacted due to the FDIC cliff at the end of the year:

Depositors whose balances have grown as a result of QE1 and QE2 have had access to noninterest-bearing accounts with unlimited FDIC insurance, which was introduced in October 2008 to improve the funding position of FDIC insured banks (for details see US Rates Viewpoint: Beware the $1.6tn deposit insurance cliff). The availability of unlimited FDIC insurance coverage of noninterest-bearing transaction accounts has represented an elastic supply of risk-free assets that have grown to US$1.6tn over the past four years. The Dodd-Frank Act extended this coverage through end-2012.


However, December 31, 2012 will see the expiration of unlimited FDIC insurance on noninterest-bearing transaction accounts unless Congress takes action to extend it, which appears unlikely. If the provision expires as scheduled, the FDIC coverage for these deposits will revert to the standard US$250,000 limit. Upon expiration, depositors will be forced to choose between moving their cash elsewhere and accepting that their deposits will be converted from government credit risk to unsecured bank credit risk.

And since when it comes to the decision of counterparty risk and cash holdings, nobody will pick a bank, which may or may not be insolvent, book value metrics aside, over Uncle Sam, it is quite likely that most will opt for short-term bonds which are rolled month after month even though they collect no interest. This means a substantial reduction in the outstandinf total deposit base of nearly $9 trillion.

Putting it all together:

QE3 and the deposit insurance cliff


Because many depositors are highly risk averse, we expect that a portion of the US$1.6tn in fully insured deposits in accounts with more than US$250,000 in balances will leave banks for the relative safety of money market funds and direct holdings of Treasury and agency securities. This could result in negative bill yields and wider 2y swap spreads, in our view. However, deposits of the banking system as a whole will likely not decline when this provision expires, though there may be dislocations for individual banks.


Instead, the US$2tn in Fed QE purchases that we expect over the next two years will increase the overall supply of bank deposit liabilities over time. But, unlike QE1 and QE2, the deposits created by QE3 will only be FDIC insured up to US$250,000 per account. As a result, risk-averse investors will likely bid up the price of short-dated Treasuries until the market is indifferent between holding uninsured deposits and holding Treasury bills at much lower yields. This effect will likely become more pronounced as excess liquidity in the system increases, as well as during episodes of risk aversion, when bank CDS spreads tend to widen.

In other words, prepare for negative bill yields coming soon to an indefinite future near you as unintended consequence #1293834.5 of the Fed's takeover of every market slowly materializes. At least the Treasury will soon be able to issue bonds at negative yields in the primary market as had been discussed previously. Indeed, that TBAC committee led by the new head of JPM's CIO Matt Zames, truly knows what is going on months ahead of the market (recall "Supercommittee That Runs America" Urges End To The "Zero Bound", Demands Issuance Of Negative Yield Bonds") . As to what other unexpected consequences materialize once $1.6 trillion in cash moves from point A to point X, we will all just have to wait and see.

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Coldsun's picture

Is it just me or does the title of this article work so well with the SAT verbal "dumbification" article posted above it? Or am I just part of that problem...

economics9698's picture

When to the bull shit assets turn into hard real world purchases?  Inquiring minds want to know.

CPL's picture

Pssst...don't fight city hall.  PPT is doing a money rain dance.

Ying-Yang's picture

Fiscal cliff and now unlimited FDIC expiry around 12-31-12. The Mayans were only off by a week or so. /s

CPL's picture

I doubt anyone is willing to wait that long to wait if their deposits are safe...however.  Most bank accounts have more liabilities than equity in them.  Car loans, student loan, credit card debt, cheap lines of credit, overdraft, home loans.  

What would people flee from?  Their own debt and potential to obtain more credit.  It's practically impossible to rationalize how not having a chequeing account is going to hurt them.  People with pensions are done as dinner any ways, the point of no return was QE3.  Anyone not in a pm is in big trouble if hoping their savings will be there after a decade of this type of nonsense.  That single action that defines all fundamentals should be obvious as to what the situation with the FDIC expiry.

Nothing happens, depositors aren't the majority of the deposits.  The banks are and they have carte blanche to do whatever they wish.


The dog biscuit is being waved quite vigorously to attract attention of anyone willing to risk short sales or buying a first time home.  The SAT tests alone show me that fools are born every minute and growing exponentially.  To me that's the way it will continue.  Long, mundane slide into the ditch unless someone gets an itchy trigger finger.  Then all bets are off.

camaro68ss's picture

this is turning into a bad episode of the twilight zone....


you are now entering....the bernake zone......dunt dunt dunt....

blindfaith's picture

we have criminals that have suspended prosecution, law, order, and responsibility for crimes against society. What the buggers can't take is ridicule. Ridicule is the last weapon the masses have to bring the criminals careers to an end. The ridicule of Romney for his ignorant 'private' speech is a good example of a career turning South.  No one wants to be around a laughing stock, defending bad behavior doesn't work and the kings of the world won't have it.

Ridicule, used generously by the public is a weapon.

The dumification of education has it's own criminal element.  Nothing is immune from crime.

Mercury's picture

One very possible consequence: negative bill rates as far as the eye can see.


Better T-bills than a MM fund holding T-bills....or anything else.

 But aside from that, hard assets or cash are probably more likely destinations than spending or risk assets. Sorry Ben.

fonzannoon's picture

Not to be a dick, but this article is not referring to retail, is it? I mean what actual depositor's have been a direct beneficiary of QE?

CPL's picture

Those that deposit silver and gold.

fonzannoon's picture

Good point, ain't no fdic insurance for those whack jobs.

Dr. Engali's picture

Bank of America better hurry up and default so they can throw those 75 trillion worth of derivatives that they moved over to the bank holding side on to the tax payer.

fonzannoon's picture

Hey Doc, I was thinking about your back and forth with Kito last night. Here is my 2 cents for whatever it is worth. You both seem to agree that some big deflationary crunch is coming. I agree. I think where Kito gets misunderstood is, and not to speak for him, that his big thing is cash will be king. I kind of get that. I mean who the hell out there actually has cash? Everyone has a bank account, but not really cash on hand. But you said something interesting. You said you are building up cash in order to buy metals on that deflationary dip. So, it's none of my business, but if that is your plan, then Kito's point is an interesting one.You may want to be careful where you keep that cash. My second thought is....I think if that day ever comes that you guys speak of, the price of gold may drop a lot, but when you go to buy it, I don't know that anyone will want to part with it. Just my random thoughts.

donsluck's picture

fonzannon, I was not privy to the back-and-forth you refer to, but I'll chime in anyways. As things progress from bad to worse, I see the following sequence of events:

negative interest rates lead to;

cash withdrawals (bank runs) leads to;

a major bank stops honoring their ATM cards, leads to;

growing preference for physical cash, leads to;

banning cash in favor of debit cards, leads to;

growing underground economy leads to;

further collapse of tax receipts, further reduction of economic efficiency leads to;

gradual reduction of living standards leads to;


rbg81's picture

I think you're missing the point.  The negative interest rates are for the Treasury bills.

So the Gubmint effectively makes $$ for going into debt.  The higher the deficit, the more $$ they make.

We are almost through the Looking Glass.  Ain't life grand?

fonzannoon's picture

Thats a pretty good estimation that's for sure.

aerojet's picture

The events you describe could be described as the acceleration.  Whereas I am astounded we have lasted this long since 2008, I am sure that what you describe takes hold, that the vicious cycle takes less than 12 months from start to finish since so many people have no access to actual cash to even withdraw under this circumstance. 

Dr. Engali's picture

Hey Fonz thanks for your thoughts. It looks like we are all on the same page. I think kito gets beat up because he doesn't take it to the next step...what happens to th U.S Dollar. Based on what you're saying my take is he thinks it survives but anything digital is wiped out, and that sounds plausible. But I think there is a moment when cash will be king then the dollar gets wiped out due to Ben's medicine.As far as myself...the only cash I hold in the banking system is to pay bills. Any excess is pulled out immediatly.

LMAOLORI's picture



Dr. they already did that.

Bank Of America Dumps $75 Trillion In Derivatives On U.S. Taxpayers With Federal Approval


FDIC To Cover Losses On $75 Trillion Bank of America Derivative Bets

btw the FDIC also covers other programs.

FDIC also covers Revokable Trusts, Certain Retirement Accounts, etc. 

I'll tell you what would happen a Bank Run worse then 08 that is why they are trying to sneak legislation thru to continue backing the Money Market funds.

Trillion dollar bank insurance program may sneak into legislation

Regarding the FDIC and how healthy it is keeping in mind it has the full faith and credit of the US (that's you and I in reality) behind it from another post a few days ago.



Per the Q4 2011 FDIC Chief Financial Officer's report to the Board, published on March 30, 2012, the FDIC's Deposit Insurance Fund had a balance of $11.8 billion dollars.


Bank deposits in the United States at the same time are estimated to be between $8 TRILLION and $10 TRILLION. Let's be conservative and say the number is $8TTT.

11,800,000,000 divided by 8,000,000,000,000 equals 0.001475, which I will round UP to 0.0015.

That is read as "fifteen hundredths of one percent". It isn't one percent, it is fifteen hundredths of one percent. That is how much the FDIC is carrying to back all of those little signs on the teller windows that say "Each Depositor insured to at least $250,000. Backed by the full faith and credit of the United States government."



And guess what else 

A Shortage of Bonds to Back Derivatives Bets

Old but worth reading

How Safe is My FDIC-Insured Bank Account?





steve from virginia's picture


FDIC was never intended to be a dollar-for-dollar replacement for deposits. The ultimate guarantor is Treasury (as it was during the 1930s when there were many bank failures).


... the Fed's balance sheet is expected to grow by over $2 trillion in the next two years. This also means that the matched liability on the Fed's balance sheet, reserves and deposits, will grow by a like amount.


Reserves will grow not deposits, these will only become redeemed deposits (in the event of a bank run). In the mean time reserves are bookkeeping artifacts, not circulating funds.


If there are bank runs they will be for reasons unrelated to FDIC, instead they will be on account of system/central bank insolvency.

Bam_Man's picture

If investors and bank account holders thought there was ANY chance the government would let ANY depositor or TBTF bank bond holder EVER take a loss (regardless of "deposit insurance" limits) there would already have been the "Mother of All Bank Runs" here in the US. Instead, bank deposits are GROWING.

In other words, there is no longer any such thing as "unsecured bank liability risk".

It is all "Government credit risk". Period.

camaro68ss's picture

not after 12/31/12



Urban Redneck's picture

This is the lazy public sector trying to fuck with the rich greedy private sector's New Year's bashes.

TPTB will ressurect Hank Paulson's MAD bazooka, and order their elected serfs to vote the TBTF party line, even if they have to round up drunkards at gunpoint at quarter to midnight... 

Otherwise, we get to see the innaguration of HFFedline (FYI the Swiss take holidays seriously, so send your money somewhere else)

Sigep0612's picture

Negative Interest Rates are already happening in Europe.   Germany offered negative .60% (60 bps) in July and sold every one of their 2 year notes.  Depositors are so worried that their money is in harms way they're willing to lose some of their principal.  The business climate in USA is dismal.  The annual federal shortfall was $1.4T in 09, $1.3T in '10 and $1.2T in '11 and '12.   Americans want someone to wave the magic wand so that they can go about running up their Credit Card to buy a IPhone5 and not be impacted by the tsunami thats heading our way.  Meanwhile, we've got Obama more comfortable campaigning than leading.  Obama threw a $787 stimulus party for AIG, GM and other corporate favorites but did nothing to help the country and people think he walks on water. Romney walking like he's got a corncob up his $%*, can't connect to JohnQ, and talks as if he's afraid to offend someone.  Grow some %*##s.   Meanwhile, we've got JPM, BAC, and C tampering with gold and silver because if the dollars goes kaput, the whole enchinlada is gone.  So..the Bernake creates QE which ONLY helps the banks.  Gives the top 5 Banks Trillions at a cost of .25%.  What do they do with that money?  Nothing.  The cost of that Interest at .25% is $4B...can you imagine what happens when rates go up...and oh yes.....they will go up.   So..I guess I'll go down to the bank and how much I will lose by investing in a 2 yr CD and say thank you very very much.   

aerojet's picture

Uh, Swiss, too, right?  You pay a premium for the privilege of buying Swiss bonds right now.  You know the endgame is near when this kind of shit start happening--negative interest rates?  Give me a friggin' break! 

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andrewp111's picture

The chart only goes back to 2010. What was the level of non-insured transactional depostis back before there was this unlimited FDIC insurance?