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With all due respect to my friend Chris Whalen, the view from Main Street in Ashland, Missouri; Newman Grove, Nebraska or Pine Mountain, Georgia is much different than the view from the 26th floor of West 57th Street in New York City.
March 22 -
In the depths of the financial crisis, the FDIC under Chairman Sheila Bair extended 100% insurance coverage to non-deposit transactions balances of all banks. Known as the Transaction Account Guarantee program, this extraordinary extension of FDIC insurance coverage to all transaction balances was a good idea at the time, but should be allowed to expire at the end of the year.
March 21 -
Bankers shouldn't complain about intrusive government regulation while begging Congress to extend unlimited deposit insurance on large transaction accounts. It's disingenuous, and perhaps worse, it's dangerous politics.
February 22 -
While community banks call on Congress to give the Transaction Account Guarantee more time, an array of - albeit costlier - alternatives for retaining customers and liquidity does exist.
March 2
WASHINGTON — Allowing the controversial Transaction Account Guarantee program to expire on schedule this year could provide a critical boost to the Federal Home Loan Banks, according to a new argument by opponents of the government guarantee.
The debate over TAG, which provides federal backing for noninterest bearing deposits, has so far focused on whether it is truly a boon for community banks.
But lately, opponents of extending the program have said allowing it to sunset as planned on Dec. 31 could help provide a lift for Home Loan bank advances, which have fallen to a decade-long low.
"There is a lack of demand for advances generally. You wouldn't want to say it's all due to TAG. … but I do know a lot of bankers I've spoken to do believe that there is a relationship between the two," said Christopher Whalen, senior managing director of Tangent Capital Partners in New York.
The argument may have an impact on the overall debate. Although there does not appear to be a one-for-one relationship, the rapid decline in advances since the financial crisis has corresponded with the explosive growth in TAG deposits. If the program is allowed to expire, some observers say banks could return to advances to try and preserve liquidity.
But many say that inverse relationship is only the part of the story. Advances before the crisis enjoyed unprecedented growth, and, some say, were due for a drop-off.
Moreover, even if TAG ends, community banks may find other forms of low-cost deposits thanks to still-rock bottom interest rates, and banks would need to show a greater desire for mortgage loans if indeed they were to grow their advances.
"Ultimately, for advances to grow you need banks growing their balance sheet. Balance sheets are largely flat," said Brian Harris, an analyst at Moody's Investors Service. "If something changes the mix on deposit-gathering so you have less deposits, there will be more of a demand for advances. But you still need that asset base to be growing."
Bob Davis, an executive vice president for the American Bankers Association, said the drop in advances was not caused by the growth of TAG.
"The TAG program has not influenced what's happened with Home Loan bank advances," he said. "Home Loan bank advances are down for two reasons: loan demand is down because underwriting standards have returned to previous rigorous levels. Also, banks are just flush with deposits, not so much because of TAG but because of what the Federal Reserve has done with rates and the fact that until recently people weren't so interested in the stock market."
Since late 2008, when the Federal Deposit Insurance Corp. launched TAG, total noninterest-bearing deposits grew nearly 60% to $2.27 trillion last quarter. (The program was originally voluntary and fee-based, but the 2010 Dodd-Frank Act eliminated fees and made it mandatory for all institutions.)
Meanwhile, even though advances in the last three months of 2011 rose for the first time in 13 quarters, the yearend total of $327 billion was still a far cry from the more than $900 billion FHLB advances belonging to banks in mid-2008. (Data is from the FDIC.) Indeed, though advances rose to new heights during the financial crisis, they are now close to their lowest point since 2000.
Under Dodd-Frank, the special deposit backing is due to expire at the end of 2012. But many community banks, led by the Independent Community Bankers of America, claim they will suffer liquidity drains if Congress does not extend it. They argue that without the program, the largest banks will still have an implicit government guarantee that gives them an unfair advantage in attracting large deposits.
"Banks really want to be funded — and their regulators want them to be funded — with core deposits. That is where the TAG program and our push for the TAG extension comes in play," said Paul Merski, ICBA's chief economist. "I don't really see [TAG and advances] competing with each other."
But some experts say the end of the TAG program — whenever that is — will be a natural benefit for the Federal Home Loan banks, which are hesitant to take any position on the issue.
"That's a logical assumption. To the extent one source of liquidity goes away, the banks that are losing that source of liquidity will look for the next best vehicle," said Cornelius Hurley, a professor at Boston University and a board member for the Federal Home Loan Bank of Boston. (He said he was not speaking on behalf of the Boston bank.) "Home Loan bank advances would be high on the list of the next best sources of liquidity."
In a March 21
"Over the past several years, community banks have run down their FHLB advances by amounts greater than total TAG balances," Whalen wrote. "FHLB advances have fallen by more than 50% in all bank asset size categories since the TAG program began in the fourth quarter of 2008. You could argue that FDIC's TAG program has merely supplanted one government funding assistance program for another, albeit at far greater cost to the industry overall."
But in a
Some observers see a greater link between TAG deposits and other aspects of the FHLB system, besides advances. The deposit-coverage program originally arose as a way for business customers to have their administrative resources — such as payroll funds — fully covered.
William Longbrake, a former vice chairman at Washington Mutual who at one time sat on the board for the Federal Home Loan Bank of Seattle, says TAG's end would more directly affect banks' usage of FHLB letters of credit. If a bank wants to guarantee more deposits for a customer than the FDIC's standard $250,000 insurance limit, it can obtain a letter from its Home Loan bank pledging to cover more of the customer's funds if the bank fails.
"Flow-through in terms of liquidity is not the solution. But what the Federal Home Loan banks do do is they offer letters of credit," said Longbrake, who now teaches at the University of Maryland.
"You can use a letter of credit to provide 100% deposit insurance against certain classes of deposits. That is where there would be a connection, not through advances. It doesn't lead to growth in a" FHLB "balance sheet, but it does provide a source of fee income. It definitely has an impact that would arguably be beneficial to their profitability."
Meanwhile, officials in the FHLB system are reticent to wade in the debate over extending TAG. When asked, some declined comment for this story.
Al Dellibovi, president of the Federal Home Loan Bank of New York, said with the eventual end of emergency liquidity programs stemming from the crisis, "there is probably an opportunity for advances."
But the end of the TAG, he said, is not an issue on which he is focused, and a larger concern is whether banks are building their assets.
"I focus my attention towards the numbers about assets. If [banks are] creating assets, I'm in good shape, because they're going to match them with advances," Dellibovi said.
"There are all kinds of competing products out there. At the end of the day, I'm focused on the products that we offer. … I don't feel any particular competition" with TAG. "It's not something that we're focused on."
