WASHINGTON — Though Congress consented to industry requests to extend a program that provides unlimited deposit insurance coverage for non-interest-bearing checking accounts, hard questions remain about how the extension will be implemented.

For starters, although the original Federal Deposit Insurance Corp. program was voluntary, the recently enacted regulatory reform bill made it mandatory, raising concerns that banks that do not need the added coverage will now have to pay for it.

"Especially as a bank that opted out of the FDIC's program … we were definitely surprised to see unlimited deposit insurance come back and in the manner in which it came back, which was essentially forced upon banks," said Brendan Casey, product development director at the $13 billion-asset Silicon Valley Bank in Santa Clara, Calif.

Other questions include why the law will no longer cover "negotiable order of withdrawal" accounts earning small amounts of interest and how coverage of zero-interest deposits will pair with another key reform in the bill: allowing interest on business checking.

"Business clients are going to have some choices to make about what they do with their cash, and banks will have some decisions to make about what types of products to offer," Casey said.

Lawmakers gave banks another two years, through 2012, to continue receiving the benefits of the FDIC's Transaction Account Guarantee Program. The program was launched in late 2008, at the height of the crisis, to placate large deposit customers — typically businesses or municipalities with payroll accounts — concerned about their money. Banks that wanted the service paid the FDIC a fee, and those that were not interested could opt out.

The program proved highly popular. It was originally expected to last just a year, but in response to requests from the industry the FDIC extended it twice, to yearend. At last count roughly 5,800 institutions were participating.

Though several bankers — concerned about unsettling business customers once the coverage goes away — encouraged Congress to continue the program as part of regulatory reform, others were caught off guard by the extension and other changes.

"There are banks that are fairly upset about this. What we had was an optional program and you could decide whether or not you wanted it. Now you don't have a choice," said John Douglas, a partner at Davis Polk & Wardwell and a former FDIC general counsel.

The law did not institute a fee for banks to pay for the coverage, and observers expressed concern the FDIC's risk profile will increase as institutions that had opted out become covered.

They said the agency will likely include zero-interest deposits in its ratio of reserves to insured deposits, a trigger that could potentially raise premiums for everyone.

"The theory would be if those extra deposits are insured at banks that do end up failing, the loss to the FDIC would be greater, so that could eventually mean more assessments," said Mike Murphy, chief financial officer at the $292 million-asset First American Bank in Purcell, Okla.

"That may not be the best thing in the world for a lot of bankers that didn't want to participate in it in the first place."

Since the program began, it has resulted in about $1.3 billion in losses from failures of institutions holding large amounts of transaction accounts. On March 31 the TAGP guaranteed $279 billion in deposits, but that number would have risen to $355 billion if the coverage was mandatory.

"All of a sudden these accounts are insured because of the mandatory nature of it, and all the biggest banks in the country, who didn't need the guarantee before, are sitting on top of a lot of these deposits," said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. "That definitely adds actuarial risk into the" Deposit Insurance Fund.

(FDIC officials declined to comment but said the agency will likely issue a rulemaking to implement the provision as early as this fall.)

Other observers said the impact on premiums may be small, especially since bank failures are projected to ease after this year.

Robert Strand, a senior economist at the American Bankers Association, said several bankers have contacted the trade group about the changes to the TAGP. He said that, even though the reserve ratio would take a hit once transaction accounts are insured, it would rise again in 2013 when the temporary coverage expires.

He noted that the FDIC's deadline to restore the reserve ratio to the congressionally mandated minimum of 1.35% is well after the coverage of noninterest deposits would end. (The FDIC must restore the fund by 2020.)

"It will lower the reserve ratio, but on the other hand the point of the reserve ratio is to establish a schedule for recapitalizing the fund," Strand said. "By that time, these insured deposits will have rolled off anyway."

But institutions are also concerned about the congressional provisions giving no special treatment for certain accounts that do earn interest.

Under the original program's rules, NOW accounts — which can be used by charities and municipalities but not private businesses — can receive the unlimited insurance as long as they earn less than 25 basis points interest. The agency also provided coverage of certain Interest on Lawyers Trust Accounts that earn interest.

But Congress provided coverage only for accounts earning no interest, effectively excluding NOW and IOLTA accounts.

"I have heard concerns that under the program that's provided for under the Dodd-Frank Act, they can't pay interest and still get this unlimited FDIC coverage," Strand said.

Also complicating the issue is the law gave banks a much wider set of options for paying interest to business clients. Paying interest on business checking accounts has traditionally been barred, but Congress granted the ability after several institutions clamored for years that business customers should be able to earn some return on their deposits.

Bankers said the new powers — coupled with the extended deposit insurance — pose a dilemma for customers over earning a return or being fully covered.

"You're going to see banks reaching out to clients to help them better understand what they value in their banking relationships," Casey said.

Yet executives are split on which option customers will prefer. Some said interest rates are too low now to convince them to give up the extended coverage.

"I don't think the consumer wants to take chances to get a paltry 1% or 0.8% on their money in lieu of having the … insurance coverage," said David Skiles, the president and chief executive of the $257 million-asset FPB Bancorp Inc. in Port St. Lucie, Fla.

But others said there is now enough certainty to make interest-bearing accounts more appealing.

"I think that with confidence returning to the banking sector, most people would forgo the security for the interest," said Stephen Wilson, the incoming chairman of the ABA and the chief executive of the $775 million-asset LCNB Corp. in Lebanon, Ohio.

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