Senate Deals Blow to Bank Deposit Insurance

December 14, 2012Email ThisPrintNewslettersTweetArticleCommentsEfforts by small banks to protect a financial crisis-era deposit insurance program suffered a significant setback on Thursday when a bill to extend the program failed to survive a procedural vote in the U.S. Senate.

The Transaction Account Guarantee (TAG) program insures bank deposits above the $250,000 normally covered by the Federal Deposit Insurance Corp. in checking accounts that do not collect interest. It is set to expire at the end of the year.

Lobbyists for small banks have argued that letting the program end would lead U.S. companies to pull funds from bank accounts and invest elsewhere, roiling community banks that are still grappling with the sluggish economic recovery.

The bill, sponsored by Majority Leader Harry Reid, would have extended the program for two more years. But it failed to garner the 60 votes needed to overcome a procedural challenge raised by Republican senators.

The blow means it is increasingly likely TAG will expire at the end of the year.

Republican leaders in the U.S. House of Representatives have said the program should end. Bank lobbyists had hoped a strong Senate vote to extend the program would be enough to sway House leaders.

Senate Republicans said on Thursday that the extra deposit insurance is no longer needed several years after the 2007-2009 financial crisis.

Financial regulators created TAG in 2008 to reassure depositors and induce them not to pull their cash from their bank accounts. Lawmakers gave the program an extra two years as part of the Dodd-Frank law.

Large business accounts hold about $1.5 trillion insured by TAG, according to FDIC data. If the coverage lapses, supporters have said, businesses may view Treasury bills, money market accounts or other options as safer places to park cash.

In addition to bank groups, a number of local chambers of commerce, retail associations and other trade groups have supported renewal of TAG for another two years.

But big banks have said they no longer need the extra coverage. And other critics argue that TAG was always meant to be temporary.

Republicans said Senate Democratic leaders were pushing for the program to appease banks that had been hurt by the Democrat-backed 2010 Dodd-Frank financial oversight law.

“The only reason we’re doing it this way is because my friends on the other side of the aisle know that the provisions in Dodd-Frank are hurting community bankers and they’re trying to throw out a bone,” said Senator Bob Corker, a Tennessee Republican and member of the Senate Banking Committee.

Republicans forced a procedural vote on the bill by saying it violated spending limits set in a 2011 law. Fifty senators voted to waive the rules, falling short of the 60-vote threshold needed to overcome the challenge.

Supporters still may try to extend the extra insurance by including it in another bill, perhaps as part of a deficit reduction package. That was the route bank lobbyists hoped the House would take to approve the extension.

Frank Keating, president of the American Bankers Association, said small businesses would benefit from the TAG program but that banks were prepared to operate without it.

“Banks already have been communicating about the possible expiration of TAG and will work with their business customers to demonstrate the safety of their deposits,” Keating said in a statement after the vote.

FDIC Chairman Martin Gruenberg has said banks are in a strong enough position to weather the end of the extra deposit insurance.

Copyright 2012 Reuters. Click for restrictions.Email ThisPrintNewslettersTweetCategories: National NewsTopics: community banks insurance, federal deposit insurance, Federal Deposit Insurance Corp., Majority Leader Harry Reid, Senator Bob Corker, TAG program, Transaction Account GuaranteeHave a hot lead? Email us at newsdesk

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Deposit Insurance Bill Is Blocked in the Senate

The Senate on Thursday failed to clear a bill that would have extended for two more years a program that provided federal insurance for deposits kept in no-interest accounts at federally insured banks.

The arrangement, known as the Transaction Account Guarantee program, was created during the financial crisis to help shore up banks by increasing their deposit base. In the months after the program began in 2008, some $500 billion flowed into the accounts, which now total about $1.5 trillion, analysts say.

On Thursday, however, a bill that would have extended the policy through the end of 2014 failed to garner the 60 votes necessary to end debate and bring the measure to a vote.

Small to midsize banks supported the extension, as did the Obama administration, but larger banks and credit unions opposed the bill. Analysts said they expected $200 million to $300 million in cash to move from the accounts into money markets and other interest-bearing instruments in the weeks ahead.

A similar procedural hurdle was easily cleared on Tuesday by a vote of 76 to 20. This time, however, only 50 senators supported bringing the proposal to the floor.

The drop in support largely came from Republicans who had voted affirmatively on Tuesday. On Thursday, however, Republicans raised a budget point of order, saying that the bill violated the Budget Control Act because it authorized additional government financing.

The cost of the program is not borne by the government but by fees paid by banks participating in the program. Nevertheless, if a bank failed with those types of deposits, taxpayers would be responsible for paying.

Senate aides said the defeat also had less to do with the substance of the bill than with a continuing fight between the two parties over Senate rules. After the Tuesday vote, Senate Majority Leader Harry Reid, Democrat of Nevada, proposed placeholder amendments that shut out any chance for Republicans to offer amendments.

That tactic led Republicans to invoke the point of order, which required 60 votes to override.

Frank Keating, the president of the American Bankers Association, said that while his members were disappointed, they were prepared for the setback.

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