WASHINGTON — At a time when insurance mandates have provoked fierce debate, the banking industry is coalescing around an effort to continue mandatory coverage for all transaction checking deposits. But some believe such a plan is missing a key feature: choice.
The Independent Community Bankers of America and the American Bankers Association have publicly urged Congress to extend Dodd-Frank Act language requiring participation in the Transaction Account Guarantee program. But prior to Dodd-Frank, the original TAG — which regulators created in 2008 to strengthen liquidity — was voluntary and charged participants extra fees to opt in.
Some observers argue it's time to return to that prior model, noting that the banking industry is split about whether to continue the TAG program, which expires at yearend.
"Banks that feel they need access to the program in order to give comfort to customers … may well want to incur the initial expense of having voluntary insurance, whereas others would maybe choose to forego it because they have the relationships and the liquidity that they need rather than have to rely on" TAG, said James Rockett, a partner at Bingham McCutchen LLP, who says he hears from banks on both sides of the issue.
The Federal Deposit Insurance Corp., using its then-authority to provide extraordinary assistance during times of stress, originally launched TAG in the fall of 2008 with an available opt-out for institutions and a fee of 10 basis points per TAG deposit for those that wanted the coverage. In a later version, the FDIC charged a range of fees from 15 to 25 basis points, and a bank's charge was based on its risk profile. About 20% of the industry never opted in.
Partly to reduce any stigma of certain banks participating and others declining the coverage, Dodd-Frank in 2010 made it compulsory and set it to expire at the end of 2012. Fees were eliminated, and the FDIC covered its risk by including TAG deposits in the overall insured base.
Now the industry is lobbying to extend the program again, arguing that eliminating TAG altogether will compel large depositors to move their money to banks seen as too big to fail.
A voluntary program "would certainly be a better option than just doing away with it," said Randy Dennis, president of DD&F Consulting Group in Little Rock, Ark.
Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy, said while most community banks would prefer the program to continue, "Other banks are saying, 'No big deal.'"
"The scenario" of a voluntary program "could well be what plays out," he said.
Yet industry groups fighting for an extension of the Dodd-Frank version of the coverage have resisted any version of a voluntary program. The ICBA has been the most vocal, pushing for a five-year extension. More recently, the ABA said after questioning members on both sides of the issue that it had concluded a two-year extension was needed.
Paul Merski, the ICBA's chief economist, said an optional program would still unfairly benefit the industry's largest players. If too-big-to-fail institutions declined the coverage, he said, they would be perceived as stronger than their community bank competitors who opted for it.
"The problem with a voluntary program is that it doesn't get at the heart of why TAG deposit insurance coverage has to be across the board: Because you have the distortions of deposits shifting from smaller institutions to too-big-to-fail institutions," Merski said. "Banks that were being conservative and opted to stay in the program would be viewed as weaker in the eyes of depositors because they needed the insurance."
James Chessen, chief economist for the American Bankers Association, said the pros and cons of an optional program were "weighed by the membership" of the trade group when developing an official position.
"The problem is that it doesn't work well from the FDIC's standpoint in that there is a big adverse selection problem. If you have 'pay-to-play', you tend to attract institutions that need the program more than others who have no interest in it," Chessen said. "You bring in the riskiest of the pool of institutions and it's hard to both price that and you don't spread the cost of the program across a broader pool."
On the flipside, a voluntary program could still lead some banks that may find the program unnecessary to conclude they need it for competitive purposes, since a bank that offered TAG could use that to market it against a bank that did not.
"Making it voluntary runs the risk that competition will make it 'mandatory,'" said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.
But Rockett said the decision of whether an institution offers deposit insurance beyond the FDIC's standard benefit of $250,000 per customer should rest with that institution, as should the decision of whether to publicize its choice.
"This is excess insurance above the normal limit. The marketplace would normally say: If you want excess insurance, fine, but you have to pay for that," he said. "The reality is that a lot of banks would pay for it and would market the fact that they have this unlimited insurance on those obligations. Everybody would be in the position to make their own decision as to whether or not that will make a difference to their customers."