The Transaction Account Guarantee (TAG) program, instituted by the FDIC in the wake of the 2008 credit crisis, is set to expire on December 31, 2012. A proposal to extend the program recently failed to advance in the Senate.
The TAG program provided unlimited backing for accounts used for payrolls and other business or government expenses, and currently guarantees an estimated $1.5 trillion in non-interest bearing accounts above the FDIC’s general limit of $250,000.
The concern among financial institutions and industry groups such as the American Bankers Association and the Independent Community Bankers of America is that the expiration of TAG will lead account holders to move accounts from smaller institutions to bigger banks or money-market mutual funds.
“We’re disappointed that the Senate failed to vote on a temporary extension,” American Bankers Association President and Chief Executive Officer Frank Keating said in a statement, as reported by Bloomberg. “The TAG program has been fully funded by the banking industry at no taxpayer expense and millions of small businesses and municipal depositors would have valued its continuation during this period of economic recovery.”
Members of the private sector are not the only ones speaking out with concern about the expiration of TAG. In October, the National Association of State Treasurers reaffirmed a resolution calling for TAG to be extended “to provide added stability and predictability at this still-fragile time for the economy and the financial system on which it depends.”
The Credit Union National Association (CUNA), on the other hand, celebrated the Senate’s decision. CUNA President, Bill Cheney, promised to keep his eyes open for any last-minute attempts to push the proposal through before TAG expires. “We will be alert for any attempt by banks to attempt to attach this bill to some other year-end legislative package.”
On a positive note, money market funds could attract substantial sums of cash if TAG expires at year-end. At least one investment firm managing director and partner estimated hundreds of billions of dollars would return to money market funds.
We will be watching to see whether anyone pulls a rabbit out of the hat on this one, or if TAG is allowed to die a natural death.
If TAG does expire, FDIC insurance coverage for highly liquid, interest-earning deposit accounts will return to the standard coverage limit of $250,000. Insured deposit institutions (IDIs) should be prepared to set aside sufficient collateral to meet individual state requirements to secure deposits in excess of $250,000. Depositors should re-evaluate their account structure to take full advantage of the liquidity of deposit accounts and maximizing insurance coverage.
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