The Senate vote that would ultimately end the Transaction Account Guarantee (TAG) program came as a bit of a surprise to those who lobbied for the program to be extended. Despite a major push from bankers and bank associations, the Senate voted Dec. 13 against preserving the program that has provided unlimited insurance for noninterest-bearing bank accounts.
The issue over whether to keep the TAG program, which covered accounts over $250,000, or let it lapse had been a debate within the banking industry for some time. The program was enacted in October 2008 during the financial crisis that drove the nation into the Great Recession. It was extended and revised in 2010 as the economic recovery that followed the recession lagged.
Some in the banking industry believe the economy is still trying to recover and for that reason many banks and banking associations lobbied for a second extension. “We debated and discussed this issue last summer,” said Michael Smith, president of the New York Bankers Association. Smith had hoped a decision to extend the program would have been made then. “We recognized at the time that it was always designed to be temporary, but that during this time of recovery and rebuilding it was appropriate to extend the program.” Not everyone was on the same page.
One of the obstacles proponents of the TAG program faced in gaining enough support was the Congressional Budget Committee’s determination that the price for the program was too high. Republicans argued against the extension safety net because the legislation would in turn violate constraints on spending for financial services legislation. Conservative opponents also associated the program with the federal bailouts handed out in 2008 and 2009, further insisting the banking industry had weathered that storm.
The cost issue raised by the Budget Committee has been divisive, with some arguing the committee didn’t really establish who was paying for it. “The TAG program has been funded by the banks by increased premiums to the FDIC so it’s unclear certainly to the banking industry,” said John Tolomer, president and CEO of The Westchester Bank. “I think perception may be in the marketplace that it is a government program and that it’s a handout to banks but in fact it’s a program that the banks paid for.” Tolomer added that for many banks, like his, the premium increase was worth it. But their battle would remain uphill.
Some bankers couldn’t understand the FDIC’s lack of involvement in the debate. Smith said the federal bank insurer did an “objective study on the program” and inevitably left the fate of the TAG program in the hands of Congress. In a statement released by the FDIC, Andrew Gray, deputy to the chairman for communications, said “TAG was extended by statute through the Dodd-Frank Act and the FDIC has traditionally deferred to Congress in deciding appropriate deposit insurance limits.”
Looking ahead, the industry is hoping for minimal impact once the TAG program officially ends Dec. 31. On that day, the Independent Community Bankers of America, which represents approximately 5,000 small- and mid-sized financial institutions, notes that more than $1 trillion in TAG deposits will become uninsured. Tolomer said many customers with large sums in their accounts may pull their money and distribute their funds to a variety of FDIC-insured banks. For his clients, he insisted “The Westchester Bank is well positioned” so there is essentially “no reason for anyone to take any money out of our bank.”
Smith said despite that missing layer of protection for accounts, “The industry is well capitalized right now and it’s strong in New York particularly,” adding “people should feel very safe with their money in the bank and I think that’ll be the message you’ll hear going forward.”