On October 1, 2009 the FDIC extended the Transaction Account Guarantee Program (TAG) through June 30, 2009 with a modified fee structure. The banks will have until November 2 to opt-in to this revised TAG program. When January 1, 2009 rolls around, there will be a few changes. Most notable is the increase in the assessment fee from 10 basis points to either 15 basis points, 20 basis points, or 25 basis points depending on the entity’s Risk Category.
This program should not be confused with the increase in FDIC insurance coverage to $250,000 which is set to expire on December 1, 2013. The Transaction Account Guarantee Program (TAG) specifically guarantees ALL funds held in qualifying noninterest-bearing transaction accounts, including NOW accounts. It was never intended to be a permanent program, but an intervention to stabilize market turmoil at the height of the financial industry crisis.
TAG originally rolled out in October 2008 and according to the FDIC it was put in place to “address unprecedented disruptions in credit markets and the resultant inability of financial institutions to fund themselves and make loans to creditworthy borrowers.”
In reality, it was a temporary program designed to stop a run on the banks by those customers who maintained more than $250,000 in the bank; an “estimated $700 billion of deposits in non-interest-bearing transaction accounts that would not otherwise be insured.” It never was, and never will be an impetus for banks to make loans to creditworthy borrowers, as the FDIC clearly hoped it would be.
The TAG guarantee didn’t come for free. The banks had to pay FDIC an annualized 10 basis point assessment on any deposit amount that exceeded the existing deposit insurance limit. This brought an additional $700 million dollars into the coffers of the FDIC which helped to cover the losses from failing bank institutions.
Additionally, TAG provided additional insurance coverage on NOW accounts, a special type of checking account that earns interest but can only be opened by individuals, sole proprietors and not-for-profit institutions.
The FDIC received 91 comments on the proposed rule. The commenters included 60 insured depository institutions, 13 industry associations, 5 holding companies, 7 state government entities, 3 bankers’ banks, and 3 depositors. 44 supported extending it for an additional six months. 15 commenters supported ENDING the TAG program on 12-31-2009 citing less volatility in the financial markets and increased depositor and consumer confidence. And get this: the financial burden born by healthy banks when they are forced to publicly disclose that they’ve opted out and that their depositors are no longer getting the best FDIC insurance coverage.
I reviewed the public comments and found the most interesting presented by Norma Corio, Managing Director and Treasurer on behalf of Chase Bank. Chase Bank’s position is that the TAG program should not be extended. In support of this position, they state that “markets and institutions have made progress towards recovery”.
Not so, if you read the Chairman of the FDIC, Sheila Bair’s presentation to the Subcommittee on Financial Institutions on October 14, 2009. Ms. Bair clearly believes that extension of TAG for an additional six months is necessary to our economic recovery (and it’ll certainly help the depleting resources of the FDIC fund):
“As insured institutions work through their troubled assets, the list of “problem institutions” …. will grow. Over a hundred institutions were added to the FDIC’s “problem list” in the second quarter. The combined assets of the 416 banks and thrifts on the problem list now total almost $300 billion.”
Chase Bank’s letter goes on to state that a generally accepted measure of funding stability is a spread of 15 – 30 basis points between the three month libor rate (currently .28%) and the Fed Funds rate (0% to .25%) and that the industry has achieved that goal. I noticed that Chase Bank’s letter did not speak to the SPREAD between the rates they currently pay depositors (less than 1%) and the rates they charge on credit cards (up to 30%) and one has to wonder what kind of funding stability that provides to consumers across our nation. But of course, that is not Chase Bank’s concern.
The letter continues:
“Assessment rates of 25 basis points in this interest rate environment will, if passed along to the affected depositors, constitute an entirely inappropriate negative tax on those deposits and on those depositors, and encourage the withdrawal of funds. If on the other hand banks choose to simply absorb the cost of the fees, this cost will only further erode the capital strength of banks that should be building their capital base instead of paying it away.”
The question is not “IF the assessment fee is passed along to the depositors”. We all know that Chase passes their FDIC insurance fees on to their largest business depositors through all their business analyzed accounts. This hand-off of FDIC insurance fees does not happen at all banks. I cannot believe Chase’s chutzpah to complain about the cost of this additional FDIC insurance in light of the fact that they pass that cost on to their largest and presumably most valued clients.
I hardly think Chase Bank is in a position to complain about “paying away” their fees instead of rebuilding their capital. “The bank earned 82 cents per share, nearly double the expected 49 cents per share. Quarterly revenue increased to $26.62 billion from last year’s same-quarter revenue of $14.74 billion.”
Did anyone see Chase cut back on their payment of dividends which would instantly improve their capital? Clearly Chase does not equate paying out their dividends to paying away their capital.
Chase ends their letter stating that they “feel that the inclusion of NOW accounts was not justified from the beginning, and should not be included in any extension of the Program.” The group that most benefits from the inclusion of NOW accounts in the TAG program are not-for-profit institutions. Chase’s position that non-profit institutions should have been and should be excluded from the extended guarantees provided by TAG is an abomination.
One year ago our government leaders implemented programs that essentially saved this country from certain disaster. If you think times are tough now, most people have absolutely no idea how bad they would have been if our government had not stepped in with programs like the Transaction Account Guarantee Program. Every bank participated in our economic demise and that included Chase Bank. Every bank should be required to shoulder their share of the burden by supporting the programs that brought about, and continue to bring about improved financial stability and an increase in overall confidence. I am offended at Chase Bank’s letter in opposition of the continuation of the TAG program. I am not however surprised by the greed that it displays.
Consider this: In the midst of this economic crisis, with over 100 banks closed by the FDIC and more to come, the TAG program puts all banks on an equal footing, particularly for the larger depositors. Many banks still cannot afford to have a mass exodus of funds at this point in their capital recovery. If the TAG program had been cancelled, I believe that many depositors would have moved their funds to banks still perceived as “too big to fail” and Chase would be right at the top of that list. Certainly that might have been good for Chase, but devastating to the smaller banks and in turn to the FDIC fund and ultimately to the taxpayer. While I believe there eventually should be less government intervention, TAG is not the place to begin the process. In fact, I would like to see this program extended for five years instead of six months to instill confidence and stability to the business owner selecting a bank. Perhaps I’ll get my wish six months from now.
Chase Bank’s letter made their position absolutely clear: “The TAG program should not be extended.” Well Chase has the option of opting-out by November 2 and my guess is that they will do exactly that. Happily, their ‘valued’ clients have an opt-out option as well and can chose to move their accounts to another bank that will continue to provide them with the highest level of FDIC insurance available in the market.