Deposits Largely Stay Put After TAG’s End: Interactive Graphic

If any businesses have begun shifting cash from banks to money market funds now that unlimited insurance for demand deposits is gone, they’ve done so modestly so far.

Institutional holdings of money funds that invest in government bonds jumped 7%, or $49 billion, from late November to early January. Over roughly the same time, however, balances in transaction accounts also increased by about 5%, or $68 billion. (The following graphic shows data on nationwide cash aggregates, assets in different types of money funds and cash allocations at households and businesses in separate tabs. Interactive controls are described in the captions. Text continues below.)

The looming Dec. 31 expiration of the temporary deposit insurance, launched during the financial crisis to keep businesses from yanking money from payroll accounts and stabilize bank funding, prompted a feverish (and ultimately unsuccessful) effort by bank lobbyists to extend the program.

Though large banks held the vast majority of the deposits covered by the Transaction Account Guarantee program, hundreds of small banks were heavily exposed. Much of the anxiety centered on the prospect that large-balance accounts would quit small banks for big competitors that retain implicit, too-big-too-fail guarantees. Precise data on flows from small banks to large banks is not available yet.

There is also a widespread expectation that some of the overall movement of cash from money funds to banks will reverse. The most current data suggest that such a shift would occur relatively gradually.

Within money market funds, the number of shares held by institutions has been far more volatile than retail holdings (see the second tab). When the Reserve Primary Fund “broke the buck” in late 2008 – its net asset value fell below $1 a share because of losses on debt issued by Lehman Brothers, which had filed for bankruptcy – institutions mounted a run on money funds that invest in private debt and fled for the safety of deposits and funds that invest almost entirely in government debt.

The financial crisis also inaugurated a period of turbulence during which about $1.2 trillion, equivalent to a third of the industry’s peak size, bled from money funds overall, while bank deposits have continued to grow sharply. (Another sudden exodus from nongovernment money funds occurred in mid-2011 during a particularly dicey episode in the eurozone crisis that coincided with a previous showdown over the debt ceiling in the United States.)

The inverse relationship between deposits and money market fund shares appears clearly in cash allocations at corporations and households: the trends look like mirror images (see the third tab in the graphic above).

But whatever the repercussions from the expiration of TAG, they’re not happening overnight.