The Federal Deposit Insurance Corp.'s board voted Tuesday to extend by six months its program offering unlimited deposit insurance for business accounts, a sign that it remains concerned about the health of community banks.
Bankers and industry groups hailed the extension of the program, which they said helps banks avoid a liquidity problem as the economy continues to stabilize, and provides assurances to businesses that their deposits are safe with smaller banks.
"While the actions taken over the last year or so have more or less calmed the credit markets, there's still concern about the economy out there," said Peter Waller, the president and chief executive of First National Bank of the Rockies in Grand Junction, Colo. "I think this measure will go a long way to have the consumers and businesses continue to have confidence that their money and the bank is safe."
Created in 2008, the Transaction Account Guarantee program was designed to discourage businesses from pulling deposits from smaller banks amid concerns that the government would not step in to prevent small-bank failures.
FDIC Chairman Sheila Bair said at the meeting that allowing the program to expire could have caused community banks to face withdrawals from transaction accounts. That would have increased the risk of liquidity failures, and in turn increased the risk to the Deposit Insurance Fund.
Cynthia Blankenship, the vice chairman and chief operating officer of Bank of the West in Grapevine, Texas, and a former chairman of the Independent Community Bankers of America, said she was "jumping up and down" over the decision.
"I think that it is exactly just the kind of affirmative decision that shows that community banks can and will continue to play a competitive role in serving consumers' banking needs," she said.
Paul Wilson, the chairman and chief executive of Citizens National Bank in Athens, Tenn., said the program has eased the worries of community bankers. "No question about it, it's a smart thing to do," he said of the extension.
The FDIC board voted to extend the program to Dec. 31, with an option of extending it for another year. It was previously slated to expire on Dec. 31, 2009. But in August, the agency extended it six months to June 30. Institutions that chose to stay in the extended program were charged higher fees than in the original program.
Karen Thomas, the senior executive vice president for government affairs at the ICBA, said the board likely studied its list of problem banks and projections for failures. Though the economy is showing signs of recovery, analysts expect at least as many failures this year as last. "I think they as well don't want to cause any liquidity failures," Thomas said. "It would be a shame to have a bank fail that didn't have to fail because of concern from its customers and a rapid outflow of deposits."
Bair said she hoped Congress would consider a longer-term extension, a move that industry groups said they would support.
One problem with the program, Bair said, has been that large banks have opted out. When large banks exit, it leaves the FDIC more exposed because healthy banks are not paying fees to help absorb losses from small-bank failures.
She said Congress should "consider extending it until 2013 for all institutions in a manner that eliminates the adverse-selection problem and levels the playing field for banks of all sizes."
Mike Stevens, the senior vice president of regulatory policy for the Conference of State Bank Supervisors, said the group would support a permanent program to insure business accounts, but said "as long as some institutions are deemed 'too big to fail,' banks are going to continue having an issue with these types of accounts."
Ann Marie Mehlum, the chief executive of Summit Bank in Eugene, Ore., said she backs a permanent extension, but hopes banks won't need to pay extra insurance for it once the agency's troubled-bank list diminishes.
"I think as long as the public knows there are banks being closed every Friday, it's important that we are able to calm the fears of everyday depositors," she said.