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Bankers are divided over the seriousness of a provision in the Dodd-Frank Act that would repeal Regulation Q and allow banks to pay rates for demand deposits.
March 17 -
The Federal Deposit Insurance Corp. has maintained a consistent crisis-response posture — bulking up its manpower, swooping in to resolve failed institutions and standing behind their depositors. But the FDIC will undoubtedly need to pivot in a new direction in 2011.
January 7 -
TARP comes with a stigma and TALF and PPIP haven't worked as well as intended, but if there's one government program that many small and regional banks will be sorry to see go it's the TAG, or Transaction Account Guarantee program.
August 25
In October of 2008, with the country in the depths of the financial crisis, and banks failing by the dozens, Congress needed to create confidence in the safety of bank deposits. Its answer was the Transaction Account Guarantee program, which authorized the Federal Deposit Insurance Corp. to insure business transaction accounts with no limits.
There is no doubt that the program was popular. Balances in excess of the old coverage limit held in eligible transaction accounts — which by law earn no interest — now stand at $1.2 trillion.
But the program, though extended during the crisis, was always meant to be temporary, and it is finally set to expire at the end of this year. That concerns many community bankers, who worry that without unlimited FDIC insurance business owners will pull their deposits out of small institutions and move them to larger ones that are perceived to be too big to fail.
"This is the big sleeper issue of 2012. You have $1.2 trillion in deposits now insured that will no longer be insured," said Paul Merski, chief economist for the Independent Community Bankers of America.
The program used to be funded by fees assessed to participating banks, but now it is part of overall deposit insurance for which banks pay between five and nine basis points, less Tier 1 capital. Yet despite the costs, nearly 80% of ICBA members said in a recent survey that they were in favor of extending the program beyond the end of 2012. In recent weeks, some 1,400 ICBA members have sent letters to lawmakers urging them to keep TAG in place through 2017.
"Somebody, particularly Congress, should be thinking about this in a very serious way," said Merski.
Not all industry representatives are quite as concerned.
"There is a mixed feeling out there," said James Chessen, chief economist for the American Bankers Association. "Some bankers absolutely share the idea that there is plenty of liquidity now and the ending of the program won't cause huge problems. Others feel very strongly that it should continue."
Chessen said that bankers' reaction is to some degree determined by their location. The economic recovery has not taken root in every region of the country, and banks are still failing on a regular basis. In areas that continue to struggle, he said bankers are concerned about maintaining customers' confidence in the safety of their deposits.
ABA president Frank Keating on Feb. 9 sent a letter to acting FDIC Chairman Martin J. Gruenberg, requesting that the FDIC indicate whether it would support a continuation of the program if it were proposed.
The FDIC's stance is no small concern. The program is responsible for more than 20% of all deposits insured by the FDIC, meaning that it has substantially increased the Deposit Insurance Fund's exposure to losses.
The FDIC has not yet replied to the ABA's request and there is currently no obvious effort by Congress to revisit the TAG issue.
To some bankers, the lack of action at the federal level is maddening.
"It is so important in these crazy, volatile times for people to have the comfort of knowing that their accounts are insured," said Ronald Paul, chairman of the $2.8 billion-asset Eagle Bancorp Inc. in Bethesda, Md.
Paul said that 24% of his bank's deposits are in business accounts and that a "huge number" of those accounts carry balances in excess of the $250,000 insurance limit that will kick in when TAG expires.
Many of these account holders, such as
"If the TAG program went away, they would be putting that money in Goldman Sachs, which would dramatically affect my ability to make loans," he said.
Paul said that his bank currently has a loan-to-deposit ratio of 97%, and that dramatic swings in deposit levels could cause serious problems, both for his bank and for community bankers across the country, which would then trickle down to the community.
"We just made a $400,000 loan to a local restaurant that is going to employ 62 people. Do you think Bank of America is making that loan?" he asked.
Still, some community bankers meet the prospect of TAG expiring with a barely concealed yawn.
J. French Hill, CEO and chairman of the $386 million-asset Delta Trust & Bank in Parkdale, Ark., said he sees no problem in allowing the program to expire as scheduled.
"It certainly was an ameliorating policy that aided in calming the markets during the height of the crisis, but there is a great deal of liquidity in the system now, and I think banks and clients are going to go back to operating under their prior reality," he said.
Hill said that he doesn't expect community banks to suffer any significant runoff in deposits, pointing out that for clients who express concerns, banks have alternatives including sweep accounts, and various services that distribute deposits cooperatively among multiple banks, allowing large account holders to benefit from increased FDIC coverage.
Howard Hall, executive vice president and chief financial officer at the $800 million-asset Team Capital Bank in Bethlehem, Pa., admitted that when he was first contacted about this story, he thought the TAG program had already expired.
"I think people have totally forgotten about the TAG program," he said. "I think our customers pretty much moved on from the idea that there is any real risk here."
Hall said that the program was useful when it was initiated, because it calmed depositors and reduced the amount of "hand-holding" that would have been required to retain some companies' funds.
But he doesn't expect its disappearance to cause an outflow of deposits.
"We maintain a very strong liquidity position and we keep in very close touch with our customers," he said. "We don't think it is going to be an issue."
Eric S. Lansky, a director at New York-based asset management firm StoneCastle Partners, disagrees.
"Right now, if this goes away, a lot of corporate treasurers are going to be saying 'How can I be sure my deposits are safe and liquid?" Lansky said.
"Bankers may be saying, 'I'll just pay for these deposits to retain the relationship,' but the attitude of some large depositors is that what's important is return of principal not return on principal."
Lansky, whose firm offers a service that distributes large deposits across multiple banks to multiply FDIC coverage, said that bankers who have not developed a post-TAG strategy are putting their business at risk if they don't address depositors' safety concerns.
"Folks are putting that money into these accounts for the insurance coverage," agreed ICBA's Merski. "You could park that money somewhere else and at least get a little bit of interest on it, but that's not what happening. That tells the economist in me that the insurance coverage must be the most important thing."
Others worry that the biggest impact will come not immediately, but in years to come.
"The expiration of the TAG program will likely have some diluting effects to an institution's liquidity position," Ryan Henley, a managing director in the fixed-income strategies division of the brokerage firm Sterne, Agee, and Leach Inc., wrote in an email.
"This is somewhat muted by today's rate and operating environment," he continued. "Frankly, institutions are currently flush with liquidity. However, it could have much larger implications in an eventual rising rate environment. Additionally, management teams should factor this expiration into contingency funding plans, liquidity stress test assumptions and interest rate risk modeling assumptions."
For bankers in some parts of the country, though, the concern is immediate and quite local. The board of directors of the Oregon Bankers Association recently passed a resolution supporting an extension of the TAG program.
"We understand that there are some banks where it isn't important to them," said Linda Navarro, the association's president and CEO. "But there are plenty of markets in Oregon where uncertainty is still pretty prevalent and this program provides some certainty.
"I don't think a lot of federal programs have been helping community banks, but this one has. I don't want to see it pulled out prematurely."
Rob Garver is a freelance writer in Springfield, Va.
