FDIC guarantees on deposits commonly used by businesses, municipalities and nonprofits are set to expire at year end. Why do banks want an extension?
The expiration of the TAG program could force community banks to curtail lending, a tightening of liquidity that could set back the fragile economic recovery, say a coalition of bankers who are urging Congress to extend FDIC guarantees on accounts used by businesses, municipalities and others to cover payrolls and other recurring expenses.
The TAG, or Transaction Account Guarantee program, provides full insurance coverage for non-interest bearing transaction accounts. Congress created TAG during the financial crisis in 2008 to help prevent a run on these deposits, and extended the program in 2010, but TAG is set to expire at the end of the year.
The expiration could destroy community bank liquidity and small business lending, according to a statement from the Independent Community Bankers of America or ICBA. TAG accounts are “essentially checking accounts used by businesses, local governments, hospitals and other non-profit groups,” said the ICBA. The average community bank with less than $10 billion in assets under management has $23 million in TAG-insured deposits.
A coalition of 15 bankers’ banks – financial institutions serving community banks – has called for a temporary extension of the TAG program in a recent letter to Congress, explaining that community banks currently hold $200 billion in TAG accounts.
Otherwise, said the coalition, Main Street bankers would be forced to focus on replenishing deposits rather than making loans since the expiration of TAG is expected to prompt depositors to move their non-interest bearing transaction accounts to large national banks.
Another industry group, the American Bankers Association, has not taken a position on whether to extend TAG. Some ABA members support the extension, while others are concerned about the cost of the program to the banking industry and the overall risks TAG poses to the Federal Deposit Insurance Corp., according to American Banker contributor Alan Kline. The FDIC is funded through fees paid by member banks, not by U.S. taxpayers. (Not all cash accounts are FDIC insured.)
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