Postscript

Summary

In the summer of 2011, financial turmoil returned and the economic recovery faltered. Many elements of the fall 2008 flight to quality by short-term investors repeated. These cash investors switched out of uninsured money market funds and into insured bank deposits. Two sources of uncertainty caused this switch. First, investors became concerned about the political impasse over raising the U.S. debt ceiling (Wall Street Journal, June 13, 2011). As a result, funds normally parked in Treasuries were placed in bank deposits. Second, investors became fearful of defaults on Greek debt. They became aware of a flight of depositors from Greek banks (Bloomberg, June 9, 2011). Efforts of the Greek government to enact austerity measures provoked street demonstrations and threats of resignation by members of Parliament (Financial Times, June 7, 2011). Germany began arguing publicly with the European Central Bank (ECB) over the extent to which the holders of Greek debt would be forced to share in the cost of a bailout (Financial Times, June 10, 2011).

The blanket deposit insurance offered during the fall 2008 crisis by the FDIC for non-interest-bearing demand deposits exacerbated this flight. The American Banker (2011) wrote:

The program was most useful to community banks which could use the coverage to prevent business customers with transactions accounts above the standard insurance limit from going to large banks that were presumed “too big to fail.”

Three years after being launched at the height of the financial crisis, the Federal Deposit Insurance Corp.’s blanket coverage of no-interest deposits is still in effect …. An idea originally meant to help community banks has become a double-edged sword at the largest institutions, whose large-deposit inflows have swelled as investors nervous about recent economic shocks rush to safety.