Congress is smartly moving toward a vote to address a bank-funded deposit insurance program that is scheduled to end abruptly on Dec. 31. With $1.5 trillion in insured deposits scheduled to become unsecured risk unless Congress acts, it's time to clear the air on what this insurance is and why it is so important.
The Transaction Account Guarantee program provides full Federal Deposit Insurance Corp. backing of non-interest-bearing transaction accounts. TAG coverage is typically used by state treasurers, small businesses, municipal and local governments, farmers and nonprofits to secure their accounts beyond the standard $250,000 insurance. Legislation recently introduced by the Senate Majority Leader Harry Reid would temporarily extend the bank-funded coverage for two years. Here are five reasons Congress must pass the extension.
1. Prevent even more uncertainty. While consumer and business confidence and the economic recovery remain fragile, TAG deposit coverage provides a much-needed source of certainty. FDIC Chairman Martin Gruenberg stated, "Given the uncertainty in the current economic outlook, it is difficult at this time to anticipate the consequences of the program's expiration at the end of this year." With the toxic fiscal cliff of rising tax rates and reduced federal spending looming, the TAG cliff can easily be avoided.
2. Minimize deposit concentration. Allowing TAG coverage to expire would cause an untold shift in deposits from small and midsize banks to the largest banks because of their too-big-to-fail government guarantee against failure — resulting in even greater asset concentration and systemic risk. Tragically, this would be the exact opposite direction of ongoing efforts to unwind risky concentration in the financial industry. A temporary TAG extension would keep local funds in local communities to support local lending.
3. Maximize financial stability. If full FDIC coverage ends abruptly, transaction account funds could flee financial institutions at the click of a mouse. The random shift in funds could destabilize the recovering banking system, curtail access to credit and threaten the fragile economic recovery. Fleeing TAG cash could distort the oversubscribed U.S. market for short-term Treasuries already stressed by the Federal Reserve's historically aggressive policy of pumping liquidity into the economy.
4. Taxpayers are off the hook. This is one insurance program that is industry-funded. TAG coverage is fully paid for by commercial banks, not taxpayers. Not one penny of taxpayer money has ever been used to pay for FDIC insurance premiums, including TAG deposit coverage.
5. It works. The TAG program has minimized disruption in the financial system by giving banks the liquidity and stability to grow and lend. When consumer and business confidence, interest rates, global financial markets and the economy return to more normal levels, TAG will no longer be needed. But now is certainly not that time and expiration risks a significant economic setback. Instead of rolling the dice on the fate of $1.5 trillion, Congress should promptly extend this deposit coverage.
Paul Merski is executive vice president of congressional relations and chief economist for the Independent Community Bankers of America and previously served as chief economist of the Joint Economic Committee of Congress.