The Independent Community Bankers of America is pushing hard for Congress to temporarily extend FDIC insurance coverage of noninterest-bearing transaction accounts before it expires Dec. 31.
Failing to extend TAG coverage is one more headache small businesses and municipalities don’t need to worry about, said ICBA Executive Vice President and Chief Economist Paul Merski.
“Their accounts and auditors would let them know Jan. 2 that their money would be uninsured, and they would have to spread it around,” Merski said, referring to the permanent FDIC deposit limit of $250,000 per account.
Unlimited TAG coverage was established by the FDIC in October 2008 to help stabilize the banking system and protect depositors. Congress voted in 2010 to modify and extend the program through 2012; however, because the financial system has stabilized, Congress is considering letting it expire.
The FDIC released data Tuesday that shows as of June 30, approximately $1.4 trillion in bank deposits are insured by the TAG program, with $212 billion held by banks with fewer than $15 billion in assets. The community bank figure reflects an increase of $10 billion from first quarter 2012 and a $32.6 billion increase from one year ago.
CUNA Chief Economist Bill Hampel said according to his organization’s statistics, banks with less than $10 billion in assets – a figure used by the Federal Reserve, CFPB and other regulators to distinguish large institutions from small – held $123 billion in TAG-insured deposits as of June 30.
When you compare that against total deposits held by small banks, it represents just 4.5%. That figure invalidates the ICBA’s claim that the deposits are needed to fund business loans, Hampel said, because small banks also are reporting an aggregate 74% loan-to-deposit ratio.
“In the worst of cases, if TAG were not renewed, and all of that money flowed out of community banks, they could cover it with investments, still make business loans, and still have a very substantial investment cushion,” Hampel said.
Merski backed off from an ICBA claim in a release that community banks use “TAG deposit liquidity to support local lending.” However, he said the expiration of TAG would nonetheless affect liquidity, because account holders like municipalities or businesses with large payroll accounts could move their business to large banks.
The big banks wouldn’t have TAG coverage either, but because they have been deemed too big to fail, they pose less risk in the event of another financial crisis.
And, Merski added, those large account holders are also good borrowers, and would take their business loans with them, too.
The threat of losing those customers is an uncertainty Hampel said he wouldn’t want to deal with if he ran a community bank, and added it isn’t fair that big banks have the “too big to fail” advantage over their smaller counterparts.
However, the CUNA economist said he doesn’t think customers would move their business because big banks aren’t as accommodating as community banks when it comes to business lending.
“Part of the reason they have deposits is because they have good lending, so as long as they keep lending they will keep those deposits,” Hampel said.
The CUNA executive added the current cap on credit union member business lending has more of a negative effect on the economy than the expiration of the TAG program.