Wall Street dealers expect hedge funds, insurance companies and other borrowers to pull some cash from commercial banks when a financial crisis-era deposit insurance program expires at the end of the year, the Federal Reserve said on Thursday.
The U.S. central bank's quarterly survey of senior credit officers found that most expect their clients to get rid of at least some commercial bank deposits and instead park their cash in securities such as repurchase agreements, money market funds or Treasury bills.
"Dealers expected many of their clients to respond at least somewhat to the expiration of the unlimited guarantee," the survey said.
The Transaction Account Guarantee program began in the midst of the financial crisis to reassure depositors and induce them to keep their cash in banks. It removed a $250,000 cap on the size of non-interest bearing checking accounts that the Federal Deposit Insurance Corp. would insure.
Large business accounts hold about $1.5 trillion insured under the program, according to FDIC data.
Small banks have argued that letting the program end would lead U.S. companies to withdraw funds, weakening community-based lenders that are still struggling with the sluggish economic recovery.
The Fed survey, which covered the three months from September through November, also found that financial market participants were asking for more funding for mortgage-backed securities, a sign the mortgage market continues its long, slow march back to health after the financial crisis.
The Fed surveyed 22 institutions to look at the terms and conditions in the securities financing and over-the-counter derivatives markets. It found little change in credit terms and financial leverage compared to previous months.
The survey, which began in 2010, is meant to capture conditions in the so-called shadow banking system that was at the center of the 2007-2009 financial crisis. A separate longstanding Fed survey of loan officers tracks traditional lending to households and businesses.