The Transaction Account Guarantee (TAG) program will expire at the end of this year and needs Congressional action to continue its unlimited deposit insurance coverage of noninterest-bearing transaction accounts above the existing deposit insurance limit. Changes in this program may affect the current level of deposits at financial institutions. The FDIC responds to House Subcommittee information requests in advance of potential Congressional debate over extension.
FDIC Responds to Capito’s TAG Program Questions
FDIC Acting Chairman Martin Gruenberg responded to House Financial Institutions Subcommittee Chairman Shelley Moore Capito’s (R-W.Va.) June 7 letter asking the agency for its perspective on the performance of the TAG program.
Capito emphasized that there is a potential debate in Congress about the extension of the TAG program, and she asked Gruenberg a series of questions about the program’s cost, effect on the Deposit Insurance Fund (DIF), effect on the banking system’s overall liquidity, and the consequences of its expiration slated for the end of this year.
Gruenberg did not take a position in his letter. “Given the uncertainty in the current economic outlook, it is difficult at this time to anticipate the consequences of the program’s expiration at the end of this year,” he said. Gruenberg added that banks have considerable experience in managing liquidity. “We expect that they can generally adjust appropriately to large inflows or outflows of deposits. However, significant changes in the economic environment could have an impact on industry liquidity,” he said.
Gruenberg also noted:
- The TAG program’s costs have been about 3 percent of all failure costs — $2.2 billion in the first two years and $270 million over the last five quarters since Dodd-Frank extended the coverage — and his agency expects such losses to continue at the 3 percent level.
- The FDIC set current premiums with TAG losses in mind, and so far those losses haven’t been large enough to affect the DIF’s ability to reach the minimum 1.35 percent reserve ratio by September 2020.
- Almost two-thirds of the increase in insured deposits since the end of 2010 are attributable to increases in TAG deposits.
- The 10 largest banks, with 52 percent of industry assets, account for 70 percent of all TAG deposits. Banks below $1 billion, with 10 percent of industry assets, account for 3.4 percent of TAG deposits.
The American Bankers Association (ABA) which also has been aggressively seeking TAG program details from the FDIC and gathering opinions from across the industry on the issue stressed that the 112th Congress will have to make a decision on the program’s future with limited days left in its final session. Should Congress choose to extend the program, it will be essential to ensure that the enabling legislation does not include language related to other issues that the banking industry would oppose.
Meanwhile, the ABA Government Relations Council’s Administrative Committee will be considering the issue of a TAG program extension in a special July 11 conference call, and it will make a recommendation to the ABA Board at its July 16 meeting in Chicago.
Link to Gruenberg’s Letter.