Law Means TAG Coverage for All, But Not All Are Happy

By Joe Adler

Though Congress consented to industry requests to extend a program that provides unlimited deposit insurance coverage for non-interest-bearing checking accounts, hard questions remain about how the extension will be implemented. For starters, although the original Federal Deposit Insurance Corp. program was voluntary, the recently enacted regulatory reform bill made it mandatory, raising concerns that banks that do not need the added coverage will now have to pay for it. “Especially as a bank that opted out of the FDIC’s program … we were definitely surprised to see unlimited deposit insurance come back and in the manner in which it came back, which was essentially forced upon banks,” said Brendan Casey, product development director at the $13 billion-asset Silicon Valley Bank in Santa Clara, Calif. Other questions include why the law will no longer cover “negotiable order of withdrawal” accounts earning small amounts of interest and how coverage of zero-interest deposits will pair with another key reform in the bill: allowing interest on business checking. Since the program began, it has resulted in about $1.3 billion in losses from failures of institutions holding large amounts of transaction accounts. On March 31 the TAGP guaranteed $279 billion in deposits, but that number would have risen to $355 billion if the coverage was mandatory. “All of a sudden these accounts are insured because of the mandatory nature of it, and all the biggest banks in the country, who didn’t need the guarantee before, are sitting on top of a lot of these deposits,” said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. “That definitely adds actuarial risk into the” Deposit Insurance Fund.