Deposit insurance has been a stabilizing force in the US banking industry since the formation of the Federal Deposit Insurance Corporation (FDIC). During the financial crisis of 2008, the increase in FDIC levels helped avert potential runs, and aided in avoiding an even worse financial disaster. Some actions taken though were temporary, and time has come to review and renew them or face serious potential consequences.
The expiration of special U.S. deposit insurance at the end of the year has spurred banks to lobby Congress to extend the program out of fear that companies will withdraw billions of dollars. At issue is the Transaction Account Guarantee (TAG) program, which insures all bank deposits in checking accounts above the $250,000 coverage already provided by the Federal Deposit Insurance Corp.
TAG primarily benefits businesses and local governments that need quick access to large amounts of cash for payroll and other needs. About $1.3 trillion of TAG-insured deposits that do not pay interest sit at large and small U.S. banks. The TAG program was created by bank regulators and the U.S. Treasury during the 2008 financial crisis to attract cash for banks and reassure depositors that their money was safe. In 2010, Congress extended the TAG program through the end of 2012. Without another extension, businesses are likely to shift their deposits to prime money-market accounts and other short-term alternatives. The TAG program addresses treasurers’ two primary concerns: safety and a return on cash that comes from discounts banks give on other services in lieu of interest.
While the 10 largest U.S. banks hold 70 percent of TAG deposits, small banks have benefited by attracting deposits from local borrowers to fund loans that previously went to bigger banks, which are seen as safer. Community banks with under $10 billion of assets hold about $200 billion of TAG deposits – or about $23 million per bank.
Camden Fine, president of the Independent Community Bankers of America stated “Extending TAG is our No. 1 priority this year. Ending it will have a crippling impact on any kind of full economic recovery.” The safety deposit insurance offers keeps the institutionaland individual clients safely in the bank, helping them maintain capital levels.
The FDIC, meanwhile, is “neutral” on an extension, according to a spokesman. Last month, acting FDIC Chairman Martin Gruenberg told the U.S. House subcommittee on financial institutions and consumer credit that the TAG program has not had a big effect on depleting the deposit insurance fund. But he declined to speculate on how ending the program would affect banks or the economy.