State Street Corp., one of the state’s largest financial institutions, is swimming in billions of dollars in additional deposits as clients are giving up on alternatives that pay almost no interest.
The Boston firm had $52.1 billion in bank deposits as of the end of June, nearly double the $28.6 billion the amount from a year ago, according to the Federal Deposit Insurance Corp.
The increase was so large that State Street almost overtook Bank of America Corp. as the largest bank in Massachusetts ranked by deposits. Bank of America, based in Charlotte, N.C., had $54 billion in deposits in Massachusetts.
Unlike Bank of America, State Street is not a traditional bank with branches serving consumers and businesses. Instead, State Street is one of the country’s largest custodial banks, holding assets and providing recordkeeping for large institutional investors, such as mutual funds, insurers, and hedge funds.
Traditionally, those institutional investors kept their excess cash in money-market mutual funds and short-term notes such as US Treasurys, where they could earn more interest with little risk. But with interest rates near record lows, such safe havens are paying so little that many companies are simply parking the surplus cash in old-fashioned bank accounts at State Street and competitors, which typically pay little or no interest.
In addition, bank deposits qualify for unlimited insurance coverage after the FDIC sought to reassure customers in the wake of the financial crisis by temporarily lifting the limit from $250,000. The unlimited guarantee is slated to end Dec. 31.
“The unusually high level of customer deposits is driven in part by a combination of a lack of competitive alternatives and the deposit insurance provided by the FDIC,’’ said Arlene Roberts, a State Street spokeswoman.
The low interest rates have eaten into the business of companies that provide money-market funds. Boston’s Fidelity Investments, for instance, reported that assets in its money-market mutual funds dropped 3 percent this year to $424.4 billion, as of September.
The bank deposits are barely profitable for State Street. The bank puts much of that money in overnight accounts at the US Federal Reserve Bank, where it earns about 0.25 percent.
Many rival custodial banks have also seen their deposits swell. Indeed, after receiving an influx of cash last year, Bank of New York Mellon warned customers it would charge 0.13 percent a year for deposits over $50 million to cover FDIC insurance fees and other expenses after receiving an influx of cash. BNY Mellon later decided against imposing the fee.
Conventional banks also recorded gains. One of the biggest retail banks in Boston, Sovereign Bank, saw its deposits rise by nearly one-quarter. Bank of America, Eastern Bank, Citizens Bank, and TD Bank’s parent, Toronto-Dominion Bank, recorded smaller increases.