ByMichelle Clark Neely
The Transaction Account Guarantee (TAG) program, launched during the financial crisis and extended by the Dodd-Frank Act to support liquidity and bank stability, is set to end at year-end 2012. By design, money deposited in accounts covered by TAG earns no interest. Nonetheless, in the current low interest rate environment, TAG has been extremely popular; at year-end 2011, TAG-insured deposits totaled $1.6 trillion and accounted for 20 percent of total U.S. bank deposits.
TAG was originally designed as an opt-in program when the FDIC introduced it in October 2008. Participating banks paid premiums to help support the program, which was intended to provide liquidity support and stability for banks as well as to help protect the deposits of small businesses and municipal governments. As part of the Dodd-Frank legislative process, the program’s termination date was extended and the program made mandatory for all banks; the program’s estimated costs were folded into the risk-based deposit insurance premiums paid to the FDIC.
TAG has proved to be extremely popular with bankers and depositors. The combination of low interest rates and the benefits of full FDIC coverage has boosted the program. Between year-end 2010 and year-end 2011, TAG-insured deposits at U.S. banks increased almost 60 percent to $1.6 trillion. Banks of all sizes have benefited from TAG, and at year-end 2011, deposits in these accounts made up 16 percent of the liabilities on the books of U.S. banks.
The importance of deposits in TAG-insured accounts varies considerably by bank size, and large banks dominate. At year-end 2011, U.S. banks with assets of more than $15 billion held almost 90 percent of all TAG-insured deposits, compared with holding 74 percent of all U.S. bank deposits; the ratio of TAG-insured deposits to total deposits at these institutions averaged 24 percent. For smaller banks, especially community banks with assets of less than $1 billion, TAG-insured deposits make up a fairly minimal source of liquidity. At year-end 2011, TAG-insured deposits averaged 6.7 percent of total deposits at U.S. community banks and 4.6 percent at District community banks.
Many bankers, especially community bankers, favor the continuation of the TAG program through at least 2014 and perhaps permanently. They fear that these deposits—absent FDIC insurance—will migrate to larger institutions that are perceived to be too big to fail. The Independent Community Bankers of America is leading the charge to keep TAG permanent, with support from the Conference of State Bank Supervisors. These organizations argue that TAG levels the playing field by neutralizing, to a small degree, the perceived implicit government guarantee for large banks.
|Groups by Asset Size||Percent as of Dec. 31, 2010||Percent as of June 30, 2011||Percent as of Dec. 31, 2011|
|All Eighth District Banks||5.20%||6.80%||7.10%|
|District < $1 billion||3.4||3.8||4.6|
|District $1 billion - $15 billion||5||7.6||7.6|
|District > $15 billion*||18.1||21.4||19.7|
|All U.S. Banks||14.5%||16.5%||20.2%|
|U.S. < $1 billion||5||5.7||6.7|
|U.S. $1 billion - $15 billion||9.2||10.5||11.8|
|U.S. > $15 billion||14.5||19.7||24|
Those who oppose extending TAG point to a number of reasons. First, they argue that liquidity is now plentiful and that it’s very unlikely banks will experience any sort of huge runoff in deposits, even when interest rates start to rise. For clients who are concerned about losing deposit insurance coverage, banks can use sweep accounts and services that break up large deposits and distribute them among multiple cooperating banks to maintain FDIC insurance coverage at the normal $250,000 limit. Other options to maintain liquidity include using FHLB advances and increasing interest paid on other deposits and money market accounts. Banks also could potentially go to the private insurance market to maintain coverage on these accounts, although the availability and cost effectiveness of providers is by no means certain.
Other arguments against extending the program emphasize the political, reputational and regulatory risks that would come with it. Politically, it would be very difficult to get legislation extending the program to pass this election year. Even if Congress were to agree to take up the issue, banks would risk the reopening of proposals they have fought hard to defeat, such as expanded business lending powers for credit unions and an extension of the Durbin amendment in the Dodd-Frank Act to credit cards. Also troubling to some is the belief that the continuation of TAG sends a message that the banking industry is still struggling as it did during the financial crisis.
The TAG program has lost money because current premiums have not covered the losses the FDIC has incurred when a bank fails and the agency has to pay out deposits in excess of the $250,000 coverage limit. The FDIC says it will have to raise premiums to cover program losses if TAG is still in place in 2020 when the required reserve ratio jumps to 1.35 percent. The ABA estimates it would require an extra $15 billion in premiums to cover TAG-insured deposits to get to that ratio; premiums totaled just under $14 billion in 2011.
The FDIC was expected to formally weigh in on TAG by the end of June. U.S. Rep. Shelley Moore Capito, R-W.Va., had asked the agency to report to Congress the estimated costs of the program to date as well as the effects of TAG on the deposit insurance fund and overall liquidity in the banking system. She also wanted the FDIC’s assessment of what the consequences would be for the economy and banking industry if TAG expires on Dec. 31.
FDIC Final Rule on Section 343 of the Dodd-Frank Act