TARP comes with a stigma and TALF and PPIP haven't worked as well as intended, but if there's one government program that many small and regional banks will be sorry to see go it's the TAG, or Transaction Account Guarantee program.
The program, launched in October, offers banks unlimited insurance coverage on non-interest-bearing transaction accounts, for a fee of 10 cents per $100 of deposits. Many bankers will tell you that the TAG has done more to prevent deposit runs than any other government action and that, without it, more banks surely would have failed.
But the FDIC has made clear that the program was not intended to be permanent, and its challenge now is figuring out how to unwind it without spooking depositors. Though the TAG is set to expire in December, the FDIC has proposed extending it for six more months, with one big caveat: it would raise the fees for participating banks to 25 cents per $100 of deposits.
To be sure, there are bankers participating in the TAG who say the program has run its course and should be eliminated at the end of this year as planned. Many more, though, would like to see it extended not just until June 2010 as the FDIC proposes, but until December 2010 or even June 2011.
They worry that if the program is snuffed out before the economy recovers, large depositors will start moving their money to banks that are assumed to be too big to fail. In a comment letter, H. Lynn Harton, the CEO at the $13.2 billion-asset South Financial Group wrote that a "premature" removal of the TAG "will force local and community-based regional banks to significantly curtail lending activity, and in some cases, may cause failure of institutions that would otherwise be viable."
Not surprisingly, many bankers also oppose the fee hike, arguing that they can ill afford it at a time when profit margins are already razor thin.
The FDIC has good reason for wanting to raise the fees, though. To date, the TAG is in the red, largely due to the May failure of Silverton Bank, which had used the program heavily as it struggled to stay afloat. Raising the fees would give the FDIC a larger cushion in the event that another active TAG user fails. Moreover, the agency has calculated that, for the average bank, the fee increase would add just $2,200 annually to deposit costs‹an amount it contends would be more than offset by a likely bump in deposits.
One compromise being floated by bankers is assessing fees based on the bank's health (the worse the CAMELS rating, the higher the fees). It's unclear at this point if the FDIC would give serious consideration to the risk-based approach. But even if it rejects that idea and sticks to the plan to bump fees up to 25 basis points, industry observers say they expect most small and regional banks using the program would continue to do so. And why not?
At this stage, a more expensive TAG is better than no TAG at all.