It's open season on cash housed in money market funds.
For a year the government backed more than $2.5 trillion of investments in such funds, but the Treasury Department allowed that guarantee to expire last month. The lapse may prompt an exodus from money market funds and provide banks and brokerage firms a rare opportunity to snag deposits in the current low-rate environment.
As many bankers found in recent years, having a low-cost deposit base is essential in building spread income and bolstering the bottom line.
Sherief Meleis, a managing director at Novantas LLC, said there is a tendency for customers to go "short and liquid" when interest rates are low, and that banks have plenty of products that fit those needs.
"This should be a good situation for deposit-gathering," said Donald Mullineaux, a finance professor at the University of Kentucky. "Banks have learned the lesson that low-cost deposits are important to profitability, and they will go after those funds."
The Treasury Department stepped in with a guarantee for money market mutual funds following the September 2008 collapse of Lehman Brothers Holdings Inc. In Lehman's wake, several funds' net asset values dropped below a dollar, a rare occurrence called "breaking the buck" that had not taken place since 1994. The government's backing was designed to prevent a run on those funds.
In a report issued last month, the Treasury said that nearly 1,500 funds participated in the program, with $3.22 trillion in funds covered at the initiative's peak. The report said the department never had to cover any shortfalls and actually earned $1.2 billion by charging mutual funds for the guarantee. The program was allowed to expire "due to improved market confidence," the report said.
Meleis said, however, that "there is a perception of less safety in money market mutual funds" with the backing lifted.
Mullineaux said money market mutual funds also have a disadvantage when it comes to rates in the current environment. "They are still tied to short-term Treasury rates, which are extremely low right now," he said. The average maturity of a money market fund is less than a month, he said, which would correlate with a 0.06% rate for a one-month Treasury at Oct. 7.
In comparison, several banks are offering one-month certificates of deposit at 1% or more, according to data from BankRate.com.
P. Andrew Will, the director of consumer banking product management at KeyCorp, said most who invest in money market mutual funds do so out of a real or perceived need for liquidity. Banks can offer several products, such as short-term CDs and savings accounts, that can provide liquidity at a higher rate of return, he said. "It is all about the right type of funding at the right type of price," Will said.
Data indicates that banking companies have been effective moving money from mutual funds into savings products. At Sept. 21, balances in retail money funds had fallen 20% this year, according to Federal Reserve data. Balances in savings accounts at banks and thrifts, in contrast, grew 13%.
Such momentum may be short-lived. The biggest competitor for banks may be the resurgent stock market, which could give companies such as Charles Schwab Corp. and Fidelity Investments a chance to move clients over to brokerage accounts. The Dow Jones industrial average has gained 17.4% since early July; the KBW Bank Index is up 34%.
"Deposit levels will not be as robust next year for banks," Meleis warned. "Since growth rates are expected to slow, it is more important than ever for banks to take share now, and one way to do that is to target these mutual funds."
A shift back to stocks could help big banking companies. Bank of America Corp., for instance, resurrected Merrill Lynch & Co.'s iconic bull symbol as part of a broader effort to lure clients to advisory services.
Sallie Krawcheck, who runs those businesses for the company, made her pitch at a news conference for a new marketing push. "It feels to me as though the momentum is turning" back to brokerage and wealth management, she said.
Meleis said he believes banks can land a "fair share" of money leaving mutual funds, particularly among clients who need the safest investments. While the government guarantee for money market mutual funds elapsed, the Federal Deposit Insurance Corp. continues to insure bank deposits up to $250,000.