Bank Deposit Insurance Near Spotlight Again

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.