As an attorney and adviser who has worked exclusively with community banks across the country for over 30 years, I will go on record stating that the Transaction Account Guarantee program needs to be temporarily extended not simply to protect community banks, but to protect the communities they serve. There has been much debate about this issue over the past few months, and there has been some misinformation circulated about the program and the requested extension. It appears that not everyone has a clear understanding of what a temporary extension actually means to the industry.
The initial purpose of the Federal Deposit Insurance Corp's opt-in TAG program, created in 2008 during the wake of the financial crisis, was to provide security to the banking industry in a shaky economy. In 2010, with Main Street community banks suffering the effects of a severe recession created by the large banks, Congress applied TAG to all banks, bundling the program's fees into the overall FDIC insurance premiums at no cost to the taxpayer, and extended the program through 2012. Congress extended TAG because it recognized, on a bipartisan basis, that the economy had yet to recover, and the small businesses and communities that serve as its backbone needed additional security to keep their money active in the banks that served them.
While the banking industry and overall economy seem to have passed through the worst of the recession, the reality is that many parts of the country (particularly those areas that did not suffer the same "boom bust" cycle as the rest of the nation) are still struggling. Borrower fatigue is beginning to set in and the macro economy continues to put pressure on lending. The economy remains fragile and depositors and investors remain highly risk-averse, as illustrated by historically low interest rates on Treasury bonds.
If TAG is senselessly allowed to expire, many depositors may sever their relationships with the smaller banks in their communities and opt to place their money under the "protection" of the Too Big to Fail institutions. The result is that money will leave the communities that have the ability to stimulate our economy back to health. Allowing TAG to expire would tip the scales in favor of the larger institutions that caused the industry's downturn and inflict harm on our nation's small communities and the banks that serve them.
One of the popular arguments against the extension is that community banks are "carrying water" for the big banks. This is a preposterous assertion. Why would community banks lobby on behalf of their major competitors? Community bankers are very savvy business people, and to suggest they don't know what is in their best interest is insulting to an extreme. Although offering deposit protection to non-interest bearing accounts offers an inherent benefit to all banks, the issue is not whether the big banks derive a benefit from TAG through increased deposits of their own. The issue is that community banks require TAG in order to remain competitive in a struggling economy.
The federal government has created a perception of unlimited deposit insurance for money held in Too Big to Fail banks. Without the protection of programs like TAG, community banks will be competitively disadvantaged by government policy rather than being able to compete strictly in terms of products and services. A program that protects small banks and their depositor relationships is not rendered useless simply because it also benefits some larger institutions. Given a level playing field, I believe community banks are in a better position to serve our nation's economy and stimulate recovery than the larger institutions that are focused on transaction-oriented profit over hands-on service. There is a light at the end of the tunnel for the banking industry, but bankers simply need more time and the return of normal economic conditions to reach it. Extending TAG for at least two more years is the only viable option. It not only ensures that community banks are permitted to compete in a turbulent environment, but that the nation's small businesses have funds available where they need it most — in their communities.