September 18, 2012
When Congress breaks (again) this week so that members can return to campaigning, doubts will likely remain about the fate of an emergency program that has encouraged lending by smaller banks during the depths of the financial crisis and impacts $1.4 trillion in deposits.
“The world is focused on this fiscal cliff,” said Jim Getz, founder, chairman and CEO and Tristate Capital Bank in Pittsburgh, Penn. “Well, this is a cliff for us.”
Set to expire next year, the Transaction Account Guarantee (TAG) program provides insurance for bank accounts in excess of $250,000, the kind used by local governments and companies to meet payroll. The insurance—financed by premiums from banks—keeps enough safe capital on the books so that loans can be offered in a cash-strapped environment.
At Tristate Capital Bank, there are $144 million in TAG-insured deposits from small municipalities in Pennsylvania and Ohio. That sum has fallen by $35 million since the start of the year as the future of the program has become uncertain, Getz said. If TAG stops, he expects that accounts that currently average $1 million in size will fall beneath the $250,000 threshold for standard government insurance.
Without the protections in place for another two years, bank lobbyists warn that money would flow back to the largest “too-big-to-fail” institutions whose web of connections put the economy at risk. Their arguments have sparked both sympathy and suspicion on Capitol Hill, but not a clear direction as to what will happen with TAG.
“Every effort, regardless of what it is, needs a champion,” said James Ballentine, executive vice president of congressional relations and political affairs for the American Bankers Association. “While there are supporters of this, there was never a champion to push it through.”
The program has critics such as Sen. Bob Corker, R-Tenn., who has repeatedly warned that the government backstop creates a possible “moral hazard” that would lead to reckless lending.
Others such as Christopher Whalen, an investment banker for Tangent Capital Partners, warn that much of the newly-protected deposits have already gone to the biggest banks like JPMorgan Chase and Citigroup, as investors try to minimize their risk.
“For every $1 in funding a small bank gains via TAG, the large banks gain $4 per dollar of assets,” Whalen wrote in an analysis. “The TAG program is an odious subsidy.”
It does have some powerful backers, just no one the industry feels can go to the mat yet. That means its future will be decided in the frantic days after the November presidential election, as the program competes for attention against the mix of tax hikes and automatic spending cuts known as the fiscal cliff that could throw the country back into a recession.
On August 8, House Minority Whip Steny Hoyer, D-Md., Rep. Barney Frank, D-Mass., and Rep. Maxine Waters, D-Calif., sent a letter asking the White House Office of Management and Budget to support its extension for another two years. The insurance was first introduced in 2008 after the implosion on Wall Street and continued under the Dodd-Frank reforms for another two years.
As recently as July, the administration believed the program could be safely ended.
"Our judgment so far has been that it's not necessary to extend it,” Treasury Secretary Tim Geithner told the House Financial Services Committee. “That's been the judgment of the relevant authorities so far. But I know this is an issue and a concern to many people and we're going to have to look at those concerns carefully.”
But the OMB later encouraged Congress to include the program in a continuing resolution that will keep the government finances on auto-pilot through next March, according to industry sources. The Obama administration does “not comment on technical assistance provided to the Hill,” OMB spokeswoman Moira Mack emailed The Fiscal Times.
The Republican-majority House ignored the recommendation to extend the program after passing its continuing resolution last Thursday, making it unlikely it will be included in a similar measure the Senate will have to vote on this week.
That creates an unnecessary threat to the financial system, said Paul Merski, chief economist for the Independent Community Bankers of America.
“With all the uncertainty in the global financial sector, the Fed’s aggressive monetary policy keeping interest rates at extremely low levels, and the fiscal cliff, the last thing we need to have is uninsured deposits,” Merski said. “The safest thing to do would be to extend current policy.”