Banks want insurance extended | Bankrate.com

The Federal Deposit Insurance Corp., or FDIC, currently provides expanded deposit insurance for noninterest-bearing transaction accounts, which small businesses, municipalities, hospitals and other entities use to meet payroll and operational expenses.

That expanded insurance, known as the Transaction Account Guarantee, or TAG, program, was started in October 2008, extended in 2010 and is scheduled to sunset Dec. 31.

But now, state and community banking groups want Congress to continue TAG for another two years and they've made their talking points clear in a recent letter, signed by 8o banking groups and sent to congressional leaders.

The letter argues that failure to extend TAG would disrupt the banking system and hinder all those small business and other organizations that use noninterest-bearing transaction accounts. Approximately $1.4 trillion is deposited in these bank accounts, according to the Independent Community Bankers of America, or ICBA, a banking industry group in Washington, D.C.

According to the letter, the program's original purpose was to give depositors comfort that their money was safe and ensure that banks nationwide had the necessary liquidity to meet the credit needs of their communities. Those needs have not abated.

One of the banking groups' concerns is that if TAG is allowed to expire, insurance for noninterest-bearing transaction accounts will revert to the $250,000 limit for all deposit accounts and amounts over that limit -- some $1.4 trillion -- will become uninsured. Those uninsured amounts could become "hot money" that jumps from bank to bank and acts as a destabilizing factor in the banking system, according to a position paper on the ICBA website.

"The abrupt expiration of insurance coverage for noninterest-bearing transaction accounts carries the risk of sudden dislocation of funds and other unintended consequences for banks, credit availability and the economy," the associations wrote. "Notably, this coverage is not free, nor is it supported by tax dollars. Banks fully pay to have this coverage through their FDIC insurance premiums and cannot pay interest on these accounts."

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Source: http://www.bankrate.com/financing/banking/banks-want-insurance-extended/

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