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NEWS RELEASE
Sept. 19, 2008
ABA Media Contact: John Hall
(202) 663-5473
E-mail: jhall@aba.com

ABA DEEPLY CONCERNED, RAISES QUESTIONS ON TREASURY MONEY MARKET PROGRAM

WASHINGTON – The American Bankers Association expressed deep concern that the Treasury's recently announced plan to guarantee money market mutual funds runs the risk of undermining the nation's banking system. 

In a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Benjamin Bernanke, ABA President and CEO Edward L. Yingling warned that eight critical questions need to be answered before the program is finalized and any further long-term harm is done to the banking industry and the economy. 

"The debt instruments in a money market fund will pay a higher interest rate, and therefore, the fund will pay a higher interest rate than a bank deposit or short-term CD," said Yingling.  "It also appears that there will be no limit on how much an individual or institution can invest in these funds.  Therefore, they will be in a significantly superior market position to FDIC-insured bank deposits."

Yingling explains that a great majority of banks never made a subprime loan and have paid billions of dollars into the FDIC fund for the past 75 years.  And while the nation's financial system is under stress, 98 percent of banks are well-capitalized and reporting profits and continue to make loans in their local communities.

"Today's action will undermine the role of banks during this current crisis and has the potential to have an extremely negative impact in the future," he said.  "Simply put, the ability of bank to attract and keep deposits is being compromised in a profound fashion.  Our bankers are, understandably, very upset by the action."

Yingling asked Paulson and Bernanke to consider the following questions:

1. While the action is temporary, 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?
   
   
2. Banks face a wide range of regulation and examination because of their FDIC insurance to ensure their safety and soundness.  What equivalent regulation and examination will be placed on guaranteed money market funds?  How will the government ensure the safety of its guaranty without equivalent regulation?
   
   
3. How will you keep corporations from taking unreasonable advantage of the lower cost of funding provided by the guaranty by moving more and more of their financing to commercial paper in these funds?
   
   
4. Will there be any limit on the amount an individual or institution can put in a guaranteed fund and still be covered by the guaranty, or will an individual or institution be able to have millions of dollars guaranteed by the government in a single fund?
   
   
5. The guaranteed funds will generally contain commercial paper of large, AAA-rated companies.  Those companies will now have a funding advantage because of the guaranty.  Funds will be moved from bank deposits to the guaranteed funds driving down interest rates large companies will need to pay.  Since banks are the traditional lenders to smaller businesses, less credit will be available for small businesses.  How will this impact on small business lending be addressed?
   
   
6. The FDIC fund consists of tens of billions of dollars paid by banks over the years, plus the interest the fund has earned.  While the announcement says that fees will be charged for the guaranty, those fees will not fund the guaranty program in any material way.  Unlike the FDIC fund, which is pre-funded by banks and then backed in the first instance by the almost $1.5 trillion in bank capital, this new guaranty program is in the first instance a direct tax-payer funded program.  How is that fair to the banking industry and what precedents are being set?
   
   
7. What is the exit strategy?  How do you remove the guaranty at the end of the temporary period without causing severe market disruptions?
   
   
8. Will the guaranteed funds have some type of obligation to serve their communities, equivalent to the Community Reinvestment Act, which applies to banks?

The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation's banking industry and strengthen America's economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry's $13.3 trillion in assets and employ over 2 million men and women.

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