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While it's unlikely Congress will enact a bill solely devoted to extending full FDIC coverage for transaction accounts, the "lame-duck" session does allow several opportunities for renewing the deposit insurance program.
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The FDIC's original blanket coverage for transaction accounts allowed institutions to opt out or pay extra fees to participate. But industry groups say extending Dodd-Frank's version of the coverage, which eliminated fees and made participation compulsory, is the only way to go.
July 30
WASHINGTON — Community banks' quest to extend a program providing unlimited deposit insurance coverage for certain transaction accounts received a significant boost this week after Senate Majority Leader Harry Reid unveiled a bill to keep it alive for another two years.
The banking industry has been pushing frantically to extend the Transaction Account Guarantee, which covers all non-interest-bearing accounts and is due to expire at yearend.
Reid's support is the clearest sign yet that Congress will pass a bill, though substantial hurdles remain, according to industry observers.
"This just shows it has the highest levels of support to get it done," said Paul Merski, chief economist and executive vice president for congressional relations for the Independent Community Bankers of America.
Reid's bill would make one significant change. Unlike the current program, which incorporates the cost of TAG in normal Federal Deposit Insurance Corp. assessments, the Nevada Democrat's legislation would require the agency to estimate losses from the program separately and collect additional fees to offset losses related to the program.
Reid's support also does not guarantee passage. Whether enough lawmakers in both parties support an extension is still unclear, especially in the House, and it is an open question if Congress can preserve TAG with the clock ticking and Washington's attention more sharply focused on bigger issues such as negotiations over a long-term budget deal.
Even more of a concern for banks is whether a narrow TAG bill could attract amendments they oppose, such as
Most observers said a TAG extension is still more likely to pass as part of a broader bill that already has bipartisan support, rather than as a stand-alone piece of legislation. Some sources suggested Reid may be pushing a narrow bill to gauge whether any GOP members would try to stop a TAG extension from becoming law.
"It would be a Herculean task to pass this as a stand-alone bill no matter who introduces it," said Jaret Seiberg, a managing director at Guggenheim Partners.
But Seiberg said that Reid's support makes it more conceivable TAG will be added to a higher-profile vehicle. One candidate, he said, is a package of relatively uncontroversial measures to keep certain temporary tax policies — such as a lower alternative minimum tax — from expiring. (A bill addressing such tax-related issues would be separate from talks on how to avoid the so-called fiscal cliff.)
"What" Reid's bill "does is make us more bullish that you could get a TAG extension included in a yearend tax bill," Seiberg said. "It's hard to believe that Congress is going to allow the AMT fix to expire, so something has to get done on that front. The idea that you're going to sink measures that enjoy bipartisan support among voters just to make a point about a relatively uncontroversial deposit insurance extension strikes me as unlikely."
James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association, said Reid's involvement gives the effort to extend the program added credibility.
"The majority leader's interest is always helpful in any issue that's being pursued, particularly one that helps the financial services industry, both banks and credit unions," he said.
TAG was originally created by the FDIC in 2008 as a response to liquidity fears stemming from the financial crisis, and it was later extended to the end of this year as part of the 2010 Dodd-Frank Act. The program was first meant to cover the non-interest-bearing checking deposits used by businesses — concerned about the solvency of their bank — to cover payroll and other expenses.
But community banks have since complained that its expiration will lead customers to take deposits to larger institutions with implicit government guarantees. While many banks actually say they do not need the coverage, extending the program has become one of the top priorities in the lame-duck congressional session — the period between the presidential election and the end of the year — for both the American Bankers Association and the ICBA.
Merski agreed that Reid's bill "doesn't preclude TAG from being extended during the lame-duck in other forms."
"The TAG extension for two years in 2010 was bipartisan and noncontroversial. I expect the same with this TAG extension," he said. "The key concern was legislative timing and the vehicle to advance a temporary TAG extension."
But while they welcome Reid's bill, industry representatives are also wary of a TAG bill itself becoming a conduit for the credit union lending bill, which they fiercely oppose.
"We certainly would not want this type of legislation to be used as a vehicle to attach other unrelated matters," Ballentine said.
On Monday, the same day Reid introduced his bill, the ICBA and ABA along with other groups wrote a letter to congressional leaders opposing the suggested strategy by Sen. Mark Udall, D-Colo. — who has sponsored legislation to double the credit union business lending cap to 27.5% of an institution's assets — to
"Any attempts to merge this permanent power grab legislation with a temporary extension of the current Transaction Account Guarantee program or any other banking legislation will be strongly opposed by the banking industry," the groups wrote.
But it is also not a slam dunk that a straight TAG extension would be supported by enough lawmakers in both the House and Senate, and many critics still say the program gives banks and credit unions an undue benefit.
"The bill is a bad idea. There is no reason to extend TAG. It is anticompetitive and anyone who looks at the issue would understand that," said Christopher Whalen, senior managing director of Tangent Capital Partners in New York.
