So Long as Big Banks Can't Fail, Small Banks Need TAG

As the Transaction Account Guarantee program is such an important issue to community banks, I read with interest Ms. Barbara Rehm's column titled "Rehm on TAG: Don't Extend it, End it." The piece omitted discussion of the reasons the TAG was created by the FDIC in the first place and why those reasons are still valid today.

The piece says "It's disingenuous, and perhaps worse, it's dangerous politics" to extend TAG. It should have made the same point about "too big to fail," our government's policy of explicitly protecting a discreet group of commercial financial institutions that will not be allowed to fail, or the trillions in both public and non-public loans and balance sheet guarantees given to those same banks to prevent their collapse, or the regulatory forbearance given to the favored few. In community banks' view these are "intrusive government policies" that are "disingenuous, and perhaps worse, dangerous politics," as are the policies and politics of "too small to save." I refer of course to our government's explicit policy to let another discreet group of commercial financial institutions (in this case community banks) remain fully subject to free market forces and actually succeed or fail (what a novel idea).

I wish that I could agree with Ms. Rehm's point of view because, if I could, it would signal the end of these very discriminating policies of our government, and that would be wonderful news to the financial services sector indeed. But sadly, that is not the case. Too big to fail is still with us in all its government supported glory, and too small to save is painfully re-enacted nearly weekly on Friday nights — a perverse kind of "Friday Fright Night" for those unlucky enough to be involved.

Unfortunately the great flaw in Ms. Rehm's column is that it fails to address the elephant in the room — why TAG was created by the FDIC. TAG was created to support bank liquidity and stability, and prevent any sudden withdrawal of deposits which potentially could destabilize the entire banking system. It also ensured that small business, municipal, and other transaction accounts were adequately protected. It helps deal with the fact that our government has created two distinct classes of financial institutions — those that will not be allowed to fail, and those that will be allowed to fail.

In the fall of 2008, during the depth of the crisis, consumer confidence in the banking system was badly shaken. Ordinary citizens, small businesses and local governments were scrambling for safe havens for their money. What safer place is there than a bank that enjoys complete and unconditional government support? When succeeding Treasury Secretaries make public pronouncements that not one dime of depositor money is at risk in a discreet group of banks, what do you think is going to happen to the group of banks not so favored?

Ask scores of community bankers in any of the hardest hit states (I have) and they will tell you that TAG was and still is vital to their stability.

The one fact that must be recognized is that TAG covers $1.2 trillion in deposits. For those favored "can't fail" banks, they don't need TAG — they have it regardless, but for the $65 billion that does reside in the too-small-to-save community banks, that is a staggering number. And to say that the smallest banks average just 14 of these accounts is huge if you are one of those "smaller banks." I know, I was one. When I was a community banker in Ashland, Missouri, if those just 14 accounts left my bank for the branch of the too big to fail bank down the street, that could be enough to severely curtail my ability to serve the community, thus crippling the local economy. So, perhaps to the CEOs of $170 billion banks it is just 14 accounts, but to a small bank those 14 accounts make all the difference. That's how community banks really work, and how precious each and every customer and business account is to the bank. Community banks have a symbiotic relationship with their customers, and each relationship counts both for the bank and the community served by that bank.

It is easy for the CEOs of the too big to fail institutions to pontificate that community banks should disengage from government support, when the banks of those same CEOs enjoy unlimited government support regardless of TAG. And it is fair to say that many community banks would not be adversely affected at all if the TAG program expired. However, it is telling that at the recent FDIC Community Bank Advisory Council meeting, a group of twelve community bankers representing every region in the country expressed its will overwhelmingly in favor of continuing the program. I believe the reason why the FDIC Community Bank Advisory Council came down the way it did is because, as John Adams said, "the state of facts cannot be altered."

While it may or may not be appropriate to continue the TAG program forever, it should be continued, so long as the economy remains fragile. The benefits could be the critical difference to hundreds of community banks and their ability to get their Main Streets going again.

And one last fact that cannot be altered. The TAG program is costing the taxpayer nothing. So there is no government intervention or "bailout" here. The banks themselves pay for the program. So in a way, the community banks that really need the program are finally roughly on par with the too big to fail banks that enjoy unlimited, permanent one hundred percent coverage — TAG or not.

So, as long as too big to fail and too small to save banks exist and compete in the same space, the FDIC must do something to bring the scales into balance. When the specter of Friday failures fades in the minds of the general public, and the economy is healthy once again, then policy makers can consider letting TAG phase out. Regretfully, that is just not the case as yet. And until that happens, policy makers are gambling the futures of thousands of community banks, and by extension the smaller towns and cities they serve, in an economy that is not yet fully healed.

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

See related piece: Community Bankers Push for TAG Extension