A little-known bank insurance program implemented in 2008 at the height of the financial crisis may quietly slip into legislation and become permanent.
The Transaction Account Guarantee program was implemented in 2008 and provides unlimited FDIC insurance to deposits for all non-interest-bearing transaction accounts above the limit of $250,000. Today, more than $1.3 trillion in deposits are covered by the program.
As a part of the Dodd-Frank Act, TAG initially was to be phased out at the end of 2012, however, now there is a lobbying push in Congress to keep the program permanent, by way of a stealth amendment.
The insurance program protects non-interest earning accounts where many banks temporarily store money. Given that current interest rates are near zero percent, these pools serve as super safe accounts for banks.
Critics fear an extension of the TAG program would institutionalize the mantra “too big to fail.”
Treasury Secretary Tim Geithner told the Senate Banking Committee earlier this year that he sees no need to extend the TAG program, much to the ire of the ICBA.
ICBA President Camden Fine responded: “What really infuriates me is that Treasury doesn’t bat an eye to dole out billions of taxpayer dollars to too-big-to-fail firms. But when it comes to thousands of Main Street community banks who would pay for the program themselves, not one dime of taxpayer dollars, Treasury gives them the back of the hand.”
The group has spent over $2.4 million lobbying in 2012, and its lobbyists include former staff for the Securities and Exchange Commission and the U.S. Department of Treasury, according to OpenSecrets.org.
Financial blog ZeroHedge points out, “According to the FDIC, non-interest bearing deposits for the top five banks have swelled enormously, by over 100%, since 2008 when the FDIC put in place the emergency deposit insurance program known as TAG.”
Despite small banks claiming the insurance will help them compete, Tennessee Republican Sen. Bob Corker told the Wall Street Journal that this has not been the case.
“Actually, if you look at the data, we are hearing mostly right now from community banks, that money will flow out of their institutions and into the larger institutions,” Corker said. “Since this has been in place, there actually has been a greater outflow to the bigger banks from the smaller institutions.”
There is also an issue of moral hazard with the program. If banks know that unlimited amounts of money will be guaranteed in non-interest bearing accounts, they are more willing to make decisions and take risks in a way that they normally would not.
“As you know, right now we are in an almost zero interest rate environment,” Corker said. “People would rather put money into an institution even though it’s non-interest-bearing, knowing that it’s fully protected, than they would out in some money market or some other place, where they know that possibly its not.
“So there is tremendous moral hazard,” he added.
“Like all government deposit insurance, TAG rewards poorly run banks at the expense of well-run institutions, distorts the allocation of capital, and is used to justify additional regulation. And of course it puts taxpayers on the hook for private risk-taking,” a Wall Street Journal editorial states.
Corker points out the importance of getting this issue to the forefront of discussion. “[It’s important] we bring to light this issue and hopefully have a discussion about it,” he said, “So it just doesn’t happen, if you will, in a very passive way; being attached to some other piece of legislation, with people in our country, and certainly in Congress, never paying attention to it.”
“If this gets extended again, you can almost be assured that it will be that way forever,” warned Corker.
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