Most Community Banks Unprepared if TAG Expires

Many community banks are ill-prepared should lawmakers decide against extending the Transaction Account Guarantee program.

Panelists at American Banker's Regulatory Symposium in Washington also agreed that lawmakers are likely to let TAG program expire, which could make it more difficult for smaller banks to compete for deposits.

Smaller banks would be disadvantaged because most of them have not developed backup plans should depositors withdraw large sums, said Joshua Siegel, a managing principal at StoneCastle Partners, which invests heavily in community banks. Some banks have relied heavily on TAG to collect deposits, with one bank even using it as a marketing tool, Siegel said.

More than 30% of the unnamed bank's deposits are tied to TAG and the bank has made no plans for if depositors take out their money, Siegel added. "It's an issue of denial."

Community banks, by and large, favor a continuance of the TAG program. Their fear is that, if the program expires, many depositors will withdraw money from smaller banks because the deposits would surpass insurance limits maintained by the Federal Deposit Insurance Corp.

Unfortunately for TAG proponents, the prospects of Congress approving an extension "are not that great," said Oliver Ireland, a lawyer at Morrison & Foerster.

Letting TAG expire is a mistake because it will hurt community banks' ability to make loans when demand returns, said Ron Paul, the chairman, president and chief executive of Eagle Bancorp (EGBN), a $3 billion-asset banking company in Bethesda, Md.

"You're going to see increased loan demand, and to [take advantage of that] you need a reasonable cost of funds," Paul said. "TAG needs to be extended so we can manage our cost of funds on the transaction side."