WASHINGTON — While the Federal Deposit Insurance Corp. remains mum over whether Congress should extend a program that provides unlimited deposit insurance for certain checking accounts, its former leader, Sheila Bair, has broken her silence on the issue.
In a video interview with American Banker, Bair said that the Transaction Account Guarantee — which was created in 2008 during the midst of the financial crisis and is due to expire at yearend — should be extended but phased out gradually over the next two years.
Bair argued that the program, which backs non-interest bearing checking accounts, should not be allowed to abruptly expire, fearing that funds could rapidly exit the banking system as a result.
"Ending it full tilt — going from unlimited [coverage] to zero at the end of the year, with all the other stuff going on at the end of the year, is probably not a good idea," Bair said. "We don't have money market funds fixed yet and whether people want to admit it or not, a lot of that money is going to go back into the money market fund industry when the program goes away."
She expressed sympathy for community bankers, saying the abrupt end of TAG would cause the money to go to "one of two places that are still enjoying implied government backstops" — referring to too big to fail banks and the money market fund industry.
Bair's comments may provide more momentum for community bankers who are making a last-ditch attempt to extend TAG during a Congressional lame duck session after the presidential election.
"The important thing here is that there is an acknowledgement by a former head of the FDIC that extending the TAG program is appropriate in this economic environment," said Jim Chessen, chief economist with the American Bankers Association. "Her voice is adding to a chorus that says extend TAG in one form or another."
Karen Thomas, senior executive vice president for government relations and public policy, said that the group agrees with Bair that "there needs to be an extension and there are probably various ways to phase it down."
"We wholeheartedly agree there is too much uncertainty to the economy right now," she said. "Not only for community banks but for their customers, it's important there be an extension of the program so we don't have a destabilizing dislocation."
Bair's proposal differs from those pushed by the banking industry, however. While the ABA favors a straight two-year extension, the ICBA has pushed for a five-year timeline.
But Bair said the program needs to be phased out rather than ended all at once. She suggested that Congress lower the current unlimited coverage of non-interest bearing checking accounts to $1 million through the end of 2013. That cap should be lowered again to $500,000 in 2014, before returning the program to the normal $250,000 level in 2015.
That would allow regulators time to enact permanent reforms to the money market mutual fund industry, she said.
"A phase out can give a little more time to get through the money fund reforms," Bair said.
Money market mutual funds benefited after regulators provided an explicit government guarantee to the industry in 2008. As Bair detailed in her book, Bull by the Horns, the Treasury Department had not thought through the competitive implications for small banks as a result of its move to shore up money market mutuals. Business customers who wanted full protection from the government could immediately take their money from banks and deposit them into money market mutual funds.
The FDIC soon afterward agreed to provide unlimited deposit insurance coverage for business checking accounts. Congress later extended the program in 2010, making it compulsory for bankers and sunsetting it at the end of 2012 (Technically, the program is no longer called TAG, but most bankers and industry representatives continue to refer to it by that name.)
Several analysts have also said that once TAG expires, funds will rush back into money market mutual funds.
While regulators made some reforms to the mutual fund industry four years ago, they have been unable to take broader steps. Securities and Exchange Commission Chairman Mary Schapiro had to scrap a planned vote on a proposal to enact reforms after mutual fund industry opposition caused members of her board to disagree with the plan.
Treasury Secretary Tim Geithner has since upped the ante, pushing the Financial Stability Oversight Council will tackle the issue if the SEC cannot.
Even if money market mutual reforms do not happen, however, Bair said TAG needs to end. Ultimately, the government must step back, she said.
"We've got too much government in the markets already," she said. "We need to start backing out. It's not just deposit insurance, it's Fannie and Freddie and FHA. The government needs to start pulling back.
"We're supposed to be a market-based economy and the government in the financial sector is guaranteeing just about everything these days, expressly or impliedly. So it needs to end. But I hope there will be complementary pressure to get mutual fund reforms done before it does go away."