March 5, 2012
Authored by: Barry Hester and Bryan Cave Leighton Paisner
The Dodd-Frank Wall Street Reform and Consumer Protection Act codified a form of the Transaction Account Guarantee (TAG) program initiated by the FDIC that extended unlimited deposit insurance coverage to certain no- or low-interest transaction accounts. Under the Dodd-Frank version, which expires on December 31, 2012, there is no cap on FDIC insurance for “noninterest-bearing transaction accounts.” As we have explained, qualifying accounts must meet the statutory definition and cannot have even the potential to be paid interest. Congress modified this definition at the end of 2010 in order to extend coverage for IOLTA accounts (which may pay interest).
The industry is beginning to draw attention to the statutory expiration of this unlimited coverage. As originally initiated by the FDIC in 2008, the program was intended to stabilize large deposits in a time of crisis within the financial system. The Dodd-Frank extension of TAG was completely paid for by financial institutions under the general deposit insurance assessment framework. Community banks have arguably benefitted the most from the unlimited coverage provisions because the corporate, non-profit, and government depositors holding most of the affected accounts may have more concerns (real or imagined) about the continued solvency of small banks than of big banks. Without the guarantee, smaller banks may have to rely more on pricing in order to retain these depositors, potentially exposing the insurance fund to greater risk.
By one industry estimate, more than half of all TAG account balances (over $500 billion) are already held by just 19 banks over $100 billion in assets. According to the FDIC, more than three-quarters ($191.2 billion) of Q4 2011 growth in domestic deposits was attributable to account balances subject to the guarantee. The 10 largest insured banks accounted for 73.6 percent ($140.7 billion) of the growth in these balances during this period. As of December 31, 2011, the average institution with less than $1 billion in assets had 15 covered accounts worth an average of $713,000. Although liquidity is generally less of a concern than it was in 2008, these large depositors are more likely to seek loans and otherwise bank with institutions holding their TAG-size accounts.
The questions, then, are whether the industry and its regulators are unified around this issue and whether legislators will have the stomach to extend the program in an environment where initiatives seens to benefit banks are politically sensitive. The original FDIC manifestation was optional, with participating banks paying for the coverage. Although the Dodd-Frank version is universal, again, banks have picked up the tab through the assessment process. Nonetheless, it is always possible that an extension of the program will be marred as a boon to banks and a burden to taxpayers.
Notwithstanding the position of former Chairman Sheila Bair and some currently within the agency that the program should only be further extended by Congress, the FDIC stands at the center of the issue and could always extend the program administratively. FDIC’s 2008 program was authorized under the FDI Act by a determination by the Secretary of the Treasury in consultation with the FDIC and the Federal Reserve that conditions of “systemic risk” justified an exception to the least-cost-resolution requirements of the Act. It was extended by the FDIC in 2009 as a continued response to this finding, although at that time the agency also cited as “additional authority” more general statutory language relating to its mission. We believe there is footing for a similar, transitional extension of the program under this broader authority. In fact, when the FDIC extended the program in 2010 through the end of that year, it reserved the right to extend the program through 2011 without additional rulemaking. This was ultimately not necessary in light of Dodd-Frank, and we think an additional regulatory extension is unlikely to occur here without significant advocacy for it. The Independent Community Bankers of America and the American Bankers Association, for their part, have recently outlined their views on the issue.
Meanwhile, examiners are beginning to ask how banks are planning for the expiration of the program. Many institutions are balancing this expiration with Dodd-Frank’s repeal of the prohibition on the payment of interest on business checking accounts (and by extension Regulation Q). Challenging as this may be in a time of regulatory uncertainty, these considerations should also be evaluated along with Regulation D’s reserve requirements (where restructured accounts may become demand deposits).