Bankers riled by backing for money markets

A banking trade association is irked by federal regulators’ plan to temporarily guarantee money-market funds. The group claims the plan will undercut banks’ market share and damage their deposits. According to a letter the American Bankers Association sent today to Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, the government’s scheme “will undermine the role of banks during this current crisis and has the potential to have an extremely negative impact in the future. Simply put, the ability of banks to attract and keep deposits is being compromised in a profound fashion. Our bankers are, understandably, very upset by the action.” Under the setup, the U.S. Treasury will insure for one year any publicly offered money-market fund that pays a fee to participate in the program. There will be no $100,000 limit on the insurance, as there is with banks. The government will use an existing emergency fund to backstop up to $50 billion. President Bush approved the plan. The actions are necessary, the Treasury said today in a press release, because concerns about money-market funds “breaking the buck,” or falling below a net asset value of $1, like Reserve’s Primary Fund did this week, have caused a liquidity crunch and spikes in short-term interest and funding rates. “Absent the provision of such financing, there is a substantial risk of further heightened global instability,” the release said. With the backstop, no money-market funds would fall below a net asset value of $1, because the guarantee would immediately kick in. The ABA complained in its letter that “banks have paid tens of billions of dollars into the FDIC fund and have accepted the prospect of paying high insurance premiums over the next few years to keep the FDIC fund strong without asking for any government funding.” “How will you address the perception by the market that money-market mutual funds now have a permanent implicit government guaranty — much like Fannie Mae and Freddie Mac did?” Edward Yingling, ABA chief executive, asked in the letter. “How will the government ensure the safety of its guaranty without equivalent regulation?” “We respectfully suggest these and other questions need to be answered immediately.” Mr. Yingling is right to be concerned, said Christopher Whalen, managing director at Institutional Risk Analytics. “Money-market funds are direct, largely unregulated competition for the banks,” he said. “If we are going to help money-market funds, which we probably have to, we have to impose some regulations on them.” The ABA issued two other comments this week, one on Friday applauding the short-selling ban on financial stocks, and another Thursday stating that the Fannie Mae and Freddie Mac conservatorship is hurting banks by wiping out the value of their holdings of Fannie and Freddie preferred shares. In that letter Thursday, the ABA asked regulators including the FDIC, the Federal Reserve, and the Treasury, for considerations which would include delaying dividend cuts on preferred shares, and being more flexible when it comes to capital restoration plans.