Inside Financial Services

It’s Time to Toss TAG

Expansion of FDIC insurance made sense during the panic. It doesn't anymore.

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I totally agree with the lead editorial in yesterday’s Wall Street Journal, which argues against extension of the government’s Transaction Account Guarantee program providing unlimited federal insurance on non-interest-bearing business checking deposits. TAG was put in place in the midst of the 2008 financial panic to help prevent a run on a banking system that, at the time, no one was sure was even solvent. It worked, and thank heavens it did. But the panic has long since passed. In the meantime, taxpayers are left with a contingent liability of $1.3 trillion while, at the margin, the banks-their business deposits having been covered no matter what-have a little less incentive to lend and invest prudently.

Prior to TAG, FDIC insurance covered deposits up to $250,000 and provided a core level of protection that prevented runs and helped keep the banking system stable. That’s a good thing. But in a non-stressed environment, the notion that FDIC insurance should provide unlimited coverage on certain accounts makes no sense. If a bank wants protection above $250,000, let it go buy it from a private insurer. (It goes without saying, of course, that the premiums banks are paying for the government’s open-ended liability don’t come close paying for the risk the government is taking on.)

At a moment of high crisis TAG was needed, and played an important role in saving the financial system. But it’s not needed anymore. The sooner Congress winds it down, the better.

What do you think? Let me know!

10 Responses to “It’s Time to Toss TAG”

  1. The Opinion Letter

    I could not agree more that the TAG program is no longer necessary, however it is just another example of the significant input and influence the banks have in Washington. I am sure they lobbied strongly to keep the TAG program in place. Of course since so many of our lawmakers are on the banks payroll it was simply a slam dunk for the banks as usual.

  2. Chris

    THE most important point. These guys trying to risk-assign assets? Really? Stop guaranteeing every borrowing and watch prudent risk management return.

  3. Puredakota

    Well said. While it may have been justified at the height of the crisis, TAG is now is a good example of the perverse incentives (the heart of the financial mess) that enable irresponsible behavior at many levels.

  4. another view

    I would agree wholeheartedly IF TBTF were to be truly eliminated. As I see it, TAG just evens the playing field for the smaller banks that didnt have to be bailed out, TARP’d, etc.

  5. puredakota

    Another View: Good idea to get rid of TBTF. Is there a proposal out there you would endorse?

  6. CommunityBanker

    Short and to the point! I CANNOT believe that anyone would feel the need to extend this. No one has asked me about FDIC insurance coverage in at least two years.

  7. Tagsupporter

    The TBTF crowd already has this guarantee. Even their shareholders are mostly safe from total loss. Community banks do not enjoy this privilege. And for those of you that think the Congress is on the payroll of the banks, just look at the mountains of regulations that are overwhelming us. The new mortgage disclosure has over 1,000 pages of instructions. All that for a form that has been confusing borrowers since it came out.

    If Congress is the bankers’ BFF, I’d hate to see what our life would be like if they hated us. TAG is a needed element to keep community banks on par with the TBTF crowd. My bank has substantial deposits that would move out quickly to the TBTF without TAG.

    As interest rates move up, this will become less of an issue because TAG only applies to the non-interest bearing deposits. The market will ultimately phase the program out

  8. JimBob

    Totally agree. It’s amazing how long government programs can last when put in place under the guise of “stability”. Kill it.

  9. Tagsupporter

    The TBTF crowd already has this guarantee. Even their shareholders are mostly safe from total loss. Community banks do not enjoy this privilege. And for those of you that think the Congress is on the payroll of the banks, just look at the mountains of regulations that are overwhelming us. The new mortgage disclosure has over 1,000 pages of instructions. All that for a form that has been confusing borrowers since it came out.

    If Congress is the bankers’ BFF, I’d hate to see what our life would be like if they hated us. TAG is a needed element to keep community banks on par with the TBTF crowd. My bank has substantial deposits that would move out quickly to the TBTF without TAG.

    As interest rates move up, this will become less of an issue because TAG only applies to the non-interest bearing deposits. The market will ultimately phase the program out

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