Published Date: 7/6/2012
Thanks to the impending expiration of a federal program at year-end, treasurers should start managing their cash transaction accounts more closely, and they will almost surely have to expose their companies to greater counterparty risk next year. They will face some tough choices in an interest-rate climate where many cash vehicles don’t earn enough to reward risk-taking.
Designed to guard against massive withdrawals from small banks during the financial crisis, the U.S. government’s Transaction Account Guarantee (TAG) program has, since October 2008, provided unlimited insurance on businesses’ noninterest-bearing transaction accounts, used for payroll processing, for example. Government backing influenced many companies to move a large portion of their cash holdings — some of which previously went to money-market funds and T-bills — into TAG accounts. Total balances in the accounts grew even after the financial crisis ended, and only last quarter began to fall slightly, to an estimated $1.3 trillion.
But after being extended three times, including once under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the TAG program will cease at the end of 2012. Without the program, noninterest-bearing transaction accounts are insured only up to $250,000.
“The concept married company investment policies perfectly: the idea of being able to allocate an unlimited amount of money to a vehicle that’s going to provide absolute safety and security and that’s liquid is pretty attractive,” says Brandon Semilof, managing director of StoneCastle Partners, an investment adviser that among other services offers the Federal Deposit Insurance Corp.–insured Federally Insured Cash Account for banks and corporations.
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