End of TAG Program Could Put $1.3T of Deposits in Play

Banks of all sizes could have a rare shot at $1.3 trillion in deposits estimated as up for grabs when a four-year-old government safety net dissolves.

The Federal Deposit Insurance Corp. launched the Transaction Account Guarantee program, or TAG, in 2008 when banks were mired in the last financial crisis and an economic downturn. The Dodd-Frank Act extended the unlimited coverage but, without legislative intervention, the coverage will end on Dec. 31.

For now, lawmakers do not seem focused on extending the program again, industry observers say. The program's sunset could trigger a massive reshuffling of newly uninsured deposits. "At this point, there doesn't appear to be any unanimous push to maintain it," says Joshua Siegel, the chief executive of StoneCastle Partners, a New York fund that invests in community banks.

Earlier this week Siegel and Erik Eisenstein authored a report about the end of the unlimited insurance. "Something like $1.3 trillion could move within the banking system. Where is it going to go?" Siegel estimates that community banks could be particularly well-positioned to take advantage of the shift.

The country's biggest banks have benefited the most from the extended coverage, Siegel says. Banks with more than $50 billion in assets hold about 70% of the industry's deposits. In comparison, those banks hold 84% of the deposits that exceed the traditional deposit insurance coverage limits.

In that regard, the stakes are very low and there is a lot of upside potential for smaller banks, Siegel writes in his report. Community banks do not have a lot of the oversized deposits, so they are not at risk at losing them.

Granted, most small banks are already flush with deposits as companies and consumers hoard cash and reluctantly take loans. Still, those banks should not pass up a chance to improve their mix of funding, including certificates of deposit, says Dan Geller, executive vice president at research firm Market Rates Insight.

"I think if there is not an extension by the end of the year we'll start seeing campaigns for depositors to shift this money into CDs," Geller says. "Obviously, that is more desirable for the banks."

Banks would likely need to rely on programs such as StoneCastle's Federally Insured Cash Account or Promontory Financial's Certificate of Deposit Account Registry Service to spread the deposits out in $250,000 increments among several banks to gain insurance coverage. For its part, representatives at Promontory say the firm doesn't have any plans to ramp up marketing for its services.

Siegel says that some of the excess deposits could end up in short-term Treasury bills. That would only be a small fix, though, as the Treasury Department's monthly auction is about $30 billion, he says.

However, the potential opportunity for smaller banks is hinged on the shift. Some depositors may be content to keep their money at larger banks. By doing so, Siegel says, they likely believe there is a de facto guarantee by being at a depositor at a large bank.

"I think it is a bit of litmus test to see if we have really moved beyond 'too big to fail'," Siegel says. "If [TAG] expires and the money doesn't move, [depositors] are saying they expect that they would be bailed out if something happened."

Siegel's data show that there has been some easing. Deposits covered by the expanded insurance fell 5.6% in the first quarter from a quarter earlier, to $1.3 trillion.

"The first quarter of 2012 was the first time we saw even the slightest evidence that large depositors were preparing for the end," Siegel writes in his report.

Geller says there could be some depositors that are comfortable with an assumed insurance by being at a large bank, though he thinks most will want tacit insurance for their funds.

Geller estimates that about $500 billion in deposits will move to conform to the $250,000 insurance limits. "In today's environment, I just think people are more cautious than to just keep them there," he says.

Some believe depositors will stay at bigger banks, with or without the insurance coverage, including Don Shafer, the chairman of BancVue Ltd., which develops ways for community banks to offer higher interest-rate checking accounts to customers through technology.

"We've talked about this internally, and I still think that the public overall see the big banks as safer because they are too big to fail," Shafer says. "There has been nothing that gives us any evidence that it has changed."

Although small banks do not hold a large chunk of TAG-covered deposits, Shafer says he could see some customers turning to larger banks if the coverage expires.

"If I'm a business owner with $2 million in a community bank and I've been hearing the bank president talking about how he is afraid to do anything because of how heavy-handed regulators have become and I'm hearing all about Dodd-Frank, I might consider moving my money to a big bank," he says.