WASHINGTON (AP) – To prevent a possible run on banks at the height of the financial crisis four years ago, Congress expanded government insurance for certain bank deposits to include totals above the usual $250,000 limit. Now that the ceiling is about to be re-imposed, community banks fear they’ll lose customers to bigger banks and want Congress to come to their rescue.
They are being opposed by conservative groups, among others, who say that the Transaction Account Guarantee program is no longer needed and discourages the wealthy investing in the economy.
Non-interest-bearing transaction accounts are used by businesses, local governments, hospitals and farmers who need a safe place to keep money they use to meet payrolls and other short-term operating expenses. In October 2008, the Federal Deposit Insurance Corporation created the TAG program, providing unlimited insurance coverage for such accounts, to prevent a sudden withdrawal of deposits. The program was revised and extended as part of the 2010 Dodd-Frank financial overhaul act.
The program expires at the end of this year and Senate legislation to extend it for another two years, sponsored by Senate Majority Leader Harry Reid, comes up for a test vote on Tuesday. Even if it gets the 60 votes needed to stay alive, passage in the Senate is uncertain. The legislation also faces opposition in the GOP-controlled House.
If allowed to expire, the ceiling for insurance coverage will revert to $250,000.
The Independent Community Bankers of America and others seeking the extension say if Congress fails to act, it would result in nearly $1.5 trillion in TAG deposits suddenly becoming uninsured. They warn that would destabilize smaller financial institutions because depositors would shift their funds to big banks deemed a safer place to store their money should another financial crisis occur.
Community bankers dispute claims made by the program’s opponents that it has cost the FDIC almost $2.5 billion. While they acknowledge that the program increases bank-failure-related expenses by about 3 percent, they argue that those losses are covered by insurance premiums that banks pay the FDIC.
But 14 conservative and free-market groups, in a letter to Senate leaders Friday, said the TAG program “both places unlimited liability on taxpayers for bank and credit union deposits and subsidizes the ability of the wealthy to `park their money’ in ways that are unproductive for the economy.” The letter, signed by such groups as the Competitive Enterprise Institute, Tea Party WDC, R Street and the Republican National Policy Committee, said many wealthy people “will choose the security of a 100 percent guaranteed bank account rather than taking a risk with an entrepreneur.”
Megan Whittemore, spokeswoman for House Majority Leader Eric Cantor, R-Va., said the program was intended to be a temporary measure during the height of the financial crisis and that “the majority leader believes we should not continue to extend these guarantees and therefore opposes the proposal.”
The measure is also opposed by the Credit Union National Association, which ran ads saying “the banks have their hands out again.” The credit union has said an extension of the program should be accompanied by legislation that would allow credit unions to expand lending to their business members.
(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)