Washington is unintentionally fueling the shadow banking system by ending some FDIC guarantees, according to UBS strategist Boris Rjavinski.
“With a near 8 percent increase in money market fund assets in the past several months, the shadow banking system seems to be getting bigger,” he told The Post.
Driving the increase, Rjavinski said, is the FDIC’s move on Jan. 1 that ended unlimited balance insurance for corporate accounts. The insurance was introduced in 2008 to stabilize the financial system.
“Many corporate treasurers may choose to pare back on their exposure to banks through these large balance deposits now that the unlimited FDIC guarantee is gone,” Rjavinski said.
Money market funds received $200 billion of inflows in the last two months of the year. The funds invest in Treasuries and other short-term securities while often producing better returns than bank deposits.
“The interesting point is that regulators view money market funds as a part of the ‘shadow banking system,’ and therefore presenting a higher degree of risk to overall financial stability,” Rjavinski said.