Merrill Lynch's Plan May Strain Bank-FDIC in Jeopardygreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
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Feb 14, 2000 - 06:40 PM
Merrill Lynch's Plan May Strain Bank Insurance Fund: FDIC Analyst By Marcy Gordon The Associated Press
WASHINGTON (AP) - A plan by brokerage titan Merrill Lynch to switch some customers' money into insured bank accounts could lead to a sudden surge in insured deposits that may strain the federal insurance fund, an FDIC senior policy analyst warned officials Monday.
The bank insurance fund, which backs each account up to $100,000, has an adequate cushion - some $29 billion - to cover depositors' losses from bank failures. But the move by Merrill Lynch & Co., which could be emulated by other financial companies as the line between banking and brokerage blurs, has raised concern among regulators at the Federal Deposit Insurance Corp.
That's because the plan could pump as much as $100 billion into insured bank accounts without a corresponding increase in insurance premiums paid by banks to replenish the federal fund, according to a memo by FDIC senior policy analyst James McFadyen to the director of the agency's research division.
Donna Tanoue, the FDIC's chairwoman, is expected to raise the issue Wednesday at a House Banking subcommittee hearing on the bank insurance fund.
"We don't think it is appropriate for us to comment on FDIC material. This is an industry(-wide) question," said Joe Cohen, a spokesman for Merrill Lynch at its New York headquarters.
Bert Ely, a banking industry consultant, suggested that by raising the issue, the FDIC could be trying to make a case for an industrywide increase in bank insurance premiums. The federal insurance fund was socked by more than $1 billion in losses last year from eight bank failures.
"I'm not quite sure what game is being played here," said Ely, who is based in Alexandria, Va. "They're trying to scare people."
The plan by the world's biggest brokerage firm, announced two weeks ago, is part of the transformation of the nation's financial landscape brought by legislation enacted last November allowing banks, securities firms and insurance companies to get into each other's businesses.
Brokerage firms are offering more banking services, such as home mortgages, estate planning and federally insured savings accounts.
The strategy by Merrill involves a new version of its 25-year-old Cash Management Accounts, which combine interest-bearing checking - not currently federally insured - and a credit card with a brokerage account holding stocks and bonds. Customers must have $20,000 to open such an account.
Starting in June, Merrill plans to offer customers an option that will automatically "sweep" the cash now in money-market funds in the Cash Management Accounts into FDIC-insured savings accounts in its two bank affiliates.
"In the Merrill Lynch example, an increase in insured deposits of $100 billion would cause" the reserve ratio - or the balance of the insurance fund divided by insured deposits - to fall from around 1.38 percent to 1.32 percent, McFadyen, the FDIC policy analyst, said in the memo. A copy was obtained by The Associated Press.
Because Merrill's bank affiliates have the best risk rating, they are not required to pay FDIC insurance premiums, McFadyen noted in the memo Monday to William R. Watson, director of the agency's research and statistics division, and Barry Kolatch, its deputy director.
Therefore, barring the unlikely event that the banks' ratings were downgraded, McFadyen wrote, "no (insurance) fund growth would result from the insured-deposit growth attributable to the Merrill program."
He also noted that major brokerage Charles Schwab Corp. manages more than $100 billion in cash management accounts and other money-market funds. The possibility that Merrill, Schwab and other financial companies could suddenly switch large amounts of money into FDIC-insured accounts "raises questions for the federal deposit insurance system regarding the adequacy of the (insurance) funds," McFadyen wrote.
But Ely said he is "a little skeptical that the shift (into insured accounts) is going to happen that fast."
-- Spoonfed (Spoonfed@spoonfedd.xcom), February 14, 2000
Gee, BANKS sweep funds from DDA to Savings accounts ALL the time to LOWER their REQUIRED reserves deposits. This looks like a case of pot calling kettle a deep shade of grey, OR the FDIC trying to draw a line in the sand between different types of deposits. HMMMMMMmmmmmmm. Could be REAL interesting to be a Bank Regulator in the near future.
-- Chuck, a night driver (firstname.lastname@example.org), February 15, 2000.
Could be....but I sincerely doubt it.
-- number six (!@!.com), February 15, 2000.
I have two CMA account and won't be switching. Why would anyone switch over fron an interest bearing account of 5.25% compounded dailt to a bank account bearing only 2.25%?
-- Staying with (email@example.com), February 15, 2000.
You wouldn't be doing the switching. Merrill would do it for you automatically, just as banks do now with the "sweep" to which Chuck alluded. Welcome to the new world of financial de-regulation. Watch the brokerages do everything in their power to leverage gov't protections while still taking every risk they can get away with.
-- DeeEmBee (firstname.lastname@example.org), February 15, 2000.