US small banks seek guarantee extension Community banks are making a last-minute push to extend a US government guarantee of deposit accounts, amid concern that hundreds of billions of dollars could be withdrawn if the scheme ends as scheduled at the end of the year. Wall Street traders are predicting the expiry of the guarantee could push interest rates on short-term government debt lower in the new year, as corporate treasurers search for alternative havens for the cash. Lobbyists and some staffers on Capitol Hill are hoping to append an extension of the so-called "transaction account guarantee" to one of the bills going through the lame duck session of Congress, perhaps as part of the horse-trading around a budget deal that averts the fiscal cliff of spending cuts and tax rises. The Federal Deposit Insurance Corporation introduced the guarantee at the height of the credit crisis and the regulator currently backstops an extra $1.4tn of deposits held in non-interest bearing bank accounts, in return for a fee. Under normal circumstances, FDIC insurance covers only deposits up to $250,000. Analysts at RBS calculate that between $400bn and $500bn - a majority of the money that has flowed into accounts since the guarantee was last extended in 2010 - could flow back out again after December 31. Corporate treasurers are likely to put the money into Treasury bills or, more likely, into money market funds that invest in government securities, says Jim Lee, head of US interest rate derivative strategy at RBS. That could lead to a squeeze in short-dated debt commonly used as collateral between financial institutions. "The double whammy is that this buying will take place early next year at the same time as the end of the Federal Reserve's "Operation Twist,"" Mr Lee said. Operation Twist is the Fed's programme of sales of short-dated government debt, which it is using to fund the purchase of longer-dated Treasuries, in the hope of boosting the economy. Alex Roever, JPMorgan strategist, puts the likely outflow at a more modest $100bn-$300bn, but that would still be enough to put further pressure on returns for money market funds, whose margins have been squeezed by low interest rates. Community banks argue that they will be disproportionately affected by the end of the guarantee, since depositors may regard their larger rivals as "too big to fail" and therefore effectively operating with an unspoken taxpayer backstop, even if the formal guarantee goes away. Larger banks also have more diverse options for funding their operations than community banks, which rely more heavily on deposits. "There is no taxpayer money at risk, since the banks are the ones that pay into the insurance fund," said James Ballentine at the American Bankers Association, one of the groups arguing for a two-year extension. I am cautiously optimistic that this is something that can get done. We will keep pushing until they pound the gavel at the end of the session. The Independent Community Bankers of America, another trade body, is also searching for congressional sponsors of an amendment. Tim Johnson, chairman of the Senate Banking committee, who has urged the extension of the guarantee, is also said to still be trying to find support.