“I’ve recently seen some cases where banks that participated in the CDARs program were cited for accepting third-party brokered accounts,” van Doorn said, referring to the Certificate of Deposit Account Registry Service that lets banks join a network and place funds into certificates issued by other network-member banks. “It’s still an open issue.” – NJ Biz1
I had to go back a couple of weeks to find that single item suggesting that there may possibly be a moral hazard problem with CDARS.
Indeed, there seems to be an ominous reluctance in the mainstream media for bringing up CDARS in connection with the FDIC, even as the deposit insurance agency is struggling4 against the perception that it may require a bailout of its deposit fund. Nevertheless, if I’m reading the tea leaves correctly on this really obscure piece,2 there’s a serious war going on under the covers between an alarmed regulatory community and a lot of bankers who don’t want to see this particular moral hazard gravy train pulled off the tracks.
Other recent comments include letters from: J.P. Morgan Investor Services Co., who argues that the second business day filing deadline [for portfolio holdings] may pose a significant logistical challenge; Fannie Mae, who worries that "preserving the interest rate reset maturity shortening provisions for government securities that have a maturity of 731 days or less will both minimize market disruption and enable issuers of government securities to continue to meet critical internal funding needs"; the Independent Community Bankers of America, who say they are "concerned that these amendments to Rule 2a-7 may unnecessarily restrict MMF investments in FDIC-insured certificates of deposit (CDs) (CDARS and similar programs are considered "illiquid," ICBA explains); and, Nuveen Investments, who objects that the, "requirement that the underlying bond be rated in the highest short-term or long-term rating category represents a change from the current rule, which requires a rating ‘within the NRSROs’ two highest short-term or long-term rating categories.’" (Nuveen says, "Such a change would greatly reduce the amount of tender option bonds that could be acquired by tax-exempt money market funds.")
LATER: Just had a look at the Independent Bankers Association’s comment document.3 Short, but a fascinating read. These guys seem to think that the registry magically turns their CDs into US sovereign debt instruments, sort of private treasuries with higher yields. Cute.
Since the CDARS program provides an excellent source of liquidity and funding for community banks, we urge the SEC to consider treating fully-insured CDs as “liquid securities” for purposes of Rule 2a-7 so that MMFs can hold them without restriction. CDs acquired using CDARS are fully protected by the FDIC. Unlike other illiquid securities, MMFs do not need to rely on market quotations to determine the value of a CD. Fully-insured CDs should also be considered “government securities” since they are backed by the FDIC’s Deposit Insurance Fund, a line of credit from the U.S. Treasury Department, and the full faith and credit of the U.S. government.