My pal Cam Fine typically does a great job advocating on behalf of community banks, but he was off base last week, in my view, when he argued in American Banker that the FDIC should indefinitely extend its open-ended Transaction Account Guarantee deposit insurance program. The TAG program is an idea that has way outlived its usefulness. Community banks can compete against big banks just fine without it; the sooner they start doing so, the better.
TAG was instituted, you may recall, in 2008 during the dark days of the credit panic, when consumer confidence in the banking system was so low that no one was quite sure if any institution was safe. To help allay those fears, the government responded via TAG by lifting its $250,000-per-account limit on deposit insurance and making the guarantee open-ended on non-interest-bearing deposits. The program worked. Confidence in the system returned. The panic ebbed, the recession ended, and the economy began to grow again.
And yet Cam thinks community banks need to stay on TAG life support. “While it may or may not be appropriate to continue the TAG program forever,” he argues, “it should be continued as long as the economy remains fragile.” No. This recovery may be weak by historical standards, it is a recovery nonetheless. Community banks have successfully competed against larger institutions under similar economic conditions without the benefit of TAG many times in the past. They can compete TAG-less against the big banks now, too.
Cam worries that, since the typical community bank depends on a handful of high-dollar depositors for a large chunk of its funding, those depositors would shift to larger, to-big-to-fail institutions if TAG were ended. That’s mistaken. A lot more than simply a federal deposit guarantee typically ties a large depositor to his community bank. He might also be a big borrower, for example. Or simply civic-minded. For that matter, he might prefer the superior service that community banks traditionally provide. Put another way, if the only thing that’s keeping large depositors at a given community bank is the open-ended FDIC insurance, the bank deserves to see that money walk across the street.
Cam also complains that regulators consider community banks “too small to save,” which in turn puts the banks at an unfair disadvantage compared to their too-big-too-fail competitors. That gets things exactly backwards. Too-big-to-fail is the problem, not inadequate government deposit insurance. Granting an open-ended deposit guarantee to community banks only compounds the government’s risk. (Nor, for that matter, do the incremental FDIC premiums the banks pay for TAG come close to covering the incremental risk the government has taken on.) As far as that goes, the TAG safety blanket is only an inducement for community bank managements to run their institutions less prudently, rather than more so. If you don’t have to worry about big depositors wondering about your solvency, why not go a little crazy?
Community banks have thrived for years with FDIC deposit caps and there’s no reason they shouldn’t be able to now. When the banking system was on the verge of collapse, the TAG program was vital. But the system is back from the brink. It’s time for TAG to go.
What do you think? Let me know!