Rehm on TAG: Don't Extend It, End It

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.

The Transaction Account Guarantee program, or TAG, is set to expire on Dec. 31 and some bankers are asking Congress to extend it. Without an extension, they argue, money would flee smaller banks for institutions more likely to be bailed out by the government.

Is that the argument the industry wants to be making in 2012? Wouldn't it be smarter to reassure the public — and their representatives in Congress — that the industry has recovered from the 2008 financial crisis and no longer needs such extraordinary assistance?

And do supporters really believe an extension will pass cleanly in an election year? Remember nonbank competitors will lobby the issue, too, and lawmakers are sure to extract a price for the guarantee.

"It would be the end of independent banking, in my humble opinion," BB&T Corp. Chairman and Chief Executive Kelly King said last week at a conference hosted by the Federal Deposit Insurance Corp. "I think it is very, very important that we disengage from this government support. . As an industry we are already dangerously close to being viewed as a utility, and that would be the final blow."

While some are casting this as an issue of big banks versus small banks, it's not that clear-cut. In fact, four of six community bankers who spoke on one of the panel discussions at the FDIC conference said they favor letting TAG expire at yearend.

"I'm with Kelly King," said Martin Geitz, president and CEO of the $325 million-asset Simsbury Bank in Connecticut. "We are in a moment when there is a lot of anger in the country that has translated through our legislators and created a regulatory shift from what has been historically healthy and appropriate to something that is more prescriptive and more centralized."

FDIC statistics on the program might surprise some community bankers. At banks with assets of less than $10 billion, TAG deposits funded just 4% of assets, while they funded 10.1% of assets at banks over that size threshold.

The 6,769 banks with less than $1 billion of assets held $65 billion in deposits backed by the TAG program, while the 19 banks with assets over $100 billion held $1 trillion of these deposits. (See chart.) Perhaps even more telling, the smallest banks average just 14 of these accounts, while the biggest average nearly 20,000.

So it's tough to argue that the big banks have nothing to lose by letting the program expire on schedule.

Blanket insurance for non-interest-bearing accounts held by depositors like municipalities or company payrolls got its start in October 2008 when the crisis was in full swing. The FDIC created the program to stabilize a wobbly industry and extended it twice before Congress adopted it as part of the Dodd-Frank Act in July 2010. (TAG was terminated at the end of 2010, but bankers still refer to the coverage extended under the reform law by its original name.) It was an FDIC program, so participation was voluntary and the agency charged a fee for the added coverage. Congress made it mandatory, eliminated the fee and specified a sunset date of Dec. 31, 2012.

To qualify for the unlimited insurance, the money must be held in a non-interest-bearing transaction account. Still, with interest rates and thus returns so low, the security of FDIC coverage has made the accounts quite popular. TAG deposits grew 38% in the first nine months of 2011, hitting $1.4 trillion on Sept. 30.

The FDIC has not taken a position on extending TAG. Senior agency officials who moderated panels at the conference, including Director of Risk Management Supervision Sandra Thompson and Deputy to the Chairman for External Affairs Paul Nash, made a point of asking bankers their opinion without stating their own.

Asked about the program's extension in a CNBC interview Feb. 16, acting FDIC Chairman Martin Gruenberg said, "That's really going to be a judgment for the Congress to make." But the agency will eventually need to fashion a recommendation, and sooner rather than later.

The American Bankers Association pressed Gruenberg in a Feb. 9 letter to take a stand. "We believe it is critically important for the FDIC to weigh in on this matter," ABA president Frank Keating wrote.

The TAG program has lost money, but the FDIC says it is not recouping those costs through higher premiums, at least not yet. The costs come when a bank fails and the agency has to pay out deposits over the $250,000 coverage limit. The FDIC says it will charge higher premiums if TAG is still in place come 2020 when the Deposit Insurance Fund, by law, must hold $1.35 in reserves for every $100 of insured deposits.

An ABA backgrounder on the question estimates TAG would require an extra $15 billion in premiums to reach a 1.35% reserve ratio. Banks paid just under $14 billion in premiums in 2011.

The ABA has not yet taken a position. "There are no easy answers to this," Jim Chessen, its chief economist, said in an interview. "There isn't a consensus about it. Some bankers feel very strongly that it should be [extended] and other bankers feel like it hasn't been of value to them and they want to move on."

Rather than opting to extend or let the program expire, Chessen said the industry should consider other alternatives like reverting to a voluntary program or scaling the unlimited coverage back to a fixed ceiling like $5 million. "We really need to think not just 'extend or not extend,' but what other options are there," he said.

The Independent Community Bankers of America has already planted its flag, urging Congress to extend the unlimited coverage through 2017. In an interview, ICBA chief economist Paul Merski said the question is one of fairness for small banks. "A lot of the big banks talk a big game about we don't need this insurance or want it because they figure they will get away with a bailout," he said.

Ending TAG would rob community banks of the funding they need to fuel an economic recovery, Merski said. "You are playing with fire when you have 15% of deposits insured one day and not insured the next day. The worst case is that you lose the liquidity in banks that they need to do lending just at the point in time when the economy is recovering and you need that cash to increase small-business lending."

The program's expiration will be problematic for some banks, particularly those in tough markets. And it is important to remember that deposit insurance is funded by the industry.

But going to Congress and asking for an extension will be viewed as a handout or, worse, as a sign of weakness.

And an extension would not pass Congress without a fight. The government guarantee won by the money market mutual funds during the crisis was allowed to expire, and it's a fair bet those companies will oppose an extension for banks.

A bill to extend TAG also could be a vehicle for credit unions to get wider business lending powers or for extending the Durbin amendment to credit cards.

It will never be a perfect time to end TAG, but allowing it to expire when rates are low and most banks are swimming in liquidity seems a good idea to me.

If bankers really want the government off their backs, they will let the TAG program expire on schedule.

Barb Rehm is American Banker's editor at large. She welcomes feedback to her column at Barbara.Rehm@SourceMedia.com. Follow her on Twitter at @barbrehm.