Small Banks Know First-Hand That They Need TAG

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.

Chris, I imagine there are more people working in your office building than the total populations of all three of those small towns combined. In fact, your office building probably has more workers in it than a great many of the towns and small cities served by community banks.

Your piece, "TAG Actually Gives Big Banks the Advantage," argues, in essence, that big banks have more to gain from TAG extension because they hold the lion's share of TAG deposits. Of course they do. They also hold the lion's share of the nation’s banking assets, but this misses the point.

Everyone knows that unbridled concentration has created a discrete group of banks that are "too big to fail" and enjoy 100% deposit insurance regardless of FDIC coverage or any deposit insurance program for that matter. And as former chairman Greenspan stated before the Council on Foreign Relations in 2009, "[large financial institutions] have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations." We agree with former chairman Greenspan. The too-big-to-fail banks enjoy an implicit pricing advantage and subsidy because of their status.

But the concentration of TAG deposits with the megabanks doesn't make TAG any less important to the thousands of community banks that use the program. Our banks are defined in terms of millions of dollars instead of billions or even trillions, but this does not make them any less important to the communities and local rural areas they serve. In many cases the local community bank is the financial hub of the town it serves.

We agree that then-FDIC Chairman Sheila Bair did the right thing in 2008 in creating TAG to reassure depositors and stave off a dislocation of the banking system. And we need to continue to do the right thing in 2012 by temporarily extending the program until the small business sector and municipal governments feel it is safe to keep their money in their local banks and not move it to too-big-to-fail institutions. As long as we continue to have a steady string of "Friday failure nights," TAG must continue.

Let's be honest here. The megabanks don't need TAG to retain deposits but community banks do. Too-big-to-fail is an implicit, unfunded insurance policy underwritten by the taxpayer. It gives depositors all the assurances they need. In a still-fragile economy, there is no viable substitute for TAG that will reassure depositors in too-small-to-save community banks. The virtue of TAG is this: It makes the cost of insurance coverage explicit and shifts it to the banks, large and small, and away from the taxpayer.

You use numbers and statistics to argue your point, Chris. In some cases, I don't know where those numbers come from, nor do the experts I've asked. However, I prefer to argue from my point of view as one who was a long-time community banker and knows firsthand how important the TAG is to those banks that really need the extension.

As a community banker, I have to question the accuracy of information on which you build your argument. You suggest, for example, that community banks obtain "private insurance" at "one tenth the cost" of TAG. Really? Do you seriously think that community banks would reject a viable substitute at one tenth the cost?

Please don't make the mistake of underestimating the business savvy of community bankers. The market for private insurance is not stable. At the first hint of trouble, private insurers yank coverage or exit the business — as happened repeatedly during the financial crisis.

Another crucial example: You suggest that FHLB advances are a substitute for deposits attracted by TAG. FHLB advances must be pledged by collateral such as mortgages and other secured loans. Apples and oranges. Plus, substituting FHLB advances for TAG deposits does not change the FDIC premiums a bank pays since the assessment base is now assets less tangible capital (not domestic deposits).

And if extending TAG really benefits the large banks, why are they not supporting it?

Community bankers can think for themselves. The overwhelming majority of community banks (80 percent, according to a recent ICBA survey) strongly favor a temporary extension of TAG. Community bankers know their business and don't need to be enlightened from midtown Manhattan.

Camden R. Fine is the president and chief executive officer of the Independent Community Bankers of America