Community banks concerned about end of deposit insurance program
A Senate vote on Thursday all but doomed government insurance on certain bank deposits to expire on Dec. 31, which would seriously hurt community banks that depend on those funds, say industry experts.
The Transaction Account Guarantee (TAG) program insures deposits in non-interest accounts above $250,000, which is the ceiling for conventional Federal Deposit Insurance Corp. coverage.
So-called TAG accounts are commonly used by municipalities and small businesses for paying bills, especially big ones, such as payroll. Those depositors are more concerned about reliable and frequent access to a big slice of their money than about earning interest.
The fear among smaller banks is that without the added deposit insurance, businesses and municipalities would move those deposits from community banks to big banks because bailouts during the financial crisis showed the federal government won't let the biggest banks fail.
“We'd have less money to lend out” if the insurance program expired, said Jim Getz, CEO of Tri-State Capital Bank, Downtown. “The TAG program is much more important to a community bank like us than to a JPMorgan,” said Getz.
“For most smaller banks, those deposits are a meaningful source of funds,” he said. About 8 percent, or $135 million, of TriState's $1.7 billion in total deposits are insured under the TAG program.
“We can't take the risk of having those deposits at a community bank and not having them insured,” said Jackie Thompson, vice president of Excavating Associates Inc., an excavating contractor in Hyndman, Bedford County. “We'd have to move them from our community bank.”
The likely loss of TAG deposits also comes as community banks are finding it increasingly hard — and expensive — to comply with regulations heaped on the banking industry since the financial crisis. They include rules that require holding more capital and layers of compliance that necessitate hiring internal or outside experts.
The universe of TAG deposits is enormous. Banks currently hold some $1.5 trillion in TAG-insured deposits, according to the Independent Community Bankers of America
Close to $6 billion in such deposits are in 6,974 accounts of Pennsylvania banks alone, said the Washington, D.C.-based trade group.
The Pennsylvania Banker Association, a Harrisburg group that represents bigger banks, generally supports extension of the TAG program. A temporary extension “would eliminate one element of uncertainty facing depositors of insured depository institutions,” said spokeswoman Jill Helsel in a statement.
The deposit insurance program was initiated in 2008 amid the financial crisis and refined in 2010 to cover only accounts bearing no interest. But TAG was only authorized through Dec. 31.
Senate Republicans on Thursday defeated a two-year extension of the program, and there is no similar bill in the House.
Like the FDIC insurance covering deposits up to $250,000, premiums that insure TAG deposits above that amount come from banks, not taxpayers.
In response to the Senate vote, the community bankers group said lawmakers should reconsider before the Dec. 31 deadline because “now is not the time to pull the plug on this important source of (financial) stability.”
Municipalities with deposits would be even more likely to pull that money from community banks in the absence of insurance, say experts. State laws require that municipalities place their deposits in ultra-safe accounts, such as ones fully insured. Without that, the deposits would have to be back by collateral in the form of specified securities whose values municipalities are not equipped to monitor.
“So, most likely a municipality would have to pull the deposits out of the community bank,” said Bill Scanlon, CEO of Productive Capital Management Inc., a Cleveland firm that advises about 120 municipalities.
“Those deposits would go to the big banks because the general perception is the government won't let them fail,” said Tim Zimmerman, president of Standard Bank, a community bank based in Monroeville.
“That's why this is so disturbing,” he said of the insurance program's apparent demise. “The big banks, who caused the financial crisis, are the ones who would benefit from not extending the TAG program.”
Thomas Olson is a staff writer for Trib Total Media. He can be reached a 412-320-7854 or at firstname.lastname@example.org.