Looking back on the events of 2007-9, it’s easy to lose track of the various assistance programs instituted by our financial regulators.
For instance, there were at least 14 different Federal Reserve programs created. A lot of criticisms can be leveled against those programs, but at least they had some basis in law. The Federal Deposit Insurance Corporation, by constrast, created a couple of programs out of thin air, without any statutory authority.
One of those was the Transaction Account Guarantee (TAG) program. Under TAG, the usual cap on per-account deposit insurance (currently $250,000) is lifted if the account pays no interest. In today’s interest rate environment, it’s not hard for banks to offer zero-interest deposit accounts.
By the end of the first quarter of 2012, the TAG program backed over $1.5 trillion in deposits, accounting for much of the increase in insured U.S. deposits, from just under $5 trillion in Q1 2009 to over $7 trillion Q1 2012. Most of the program is concentrated in the largest banks. The 19 largest banks, each with assets in excess of $100 billion, hold two-thirds of TAG deposits, more than the remaining 7,288 U.S. banks combined. Perhaps even more shocking is that the average TAG account is for over $2 million.
Maybe it’s just the circles I travel in, but I don’t know anyone with over $2 million in bank deposits. This is a massive handout to the banks, businesses, and wealthy individuals. Given that there are actual systems of private deposit insurance in the United States (for one example, see here), TAG is not only a government giveaway, but an unnecessary one at that.
Instead of letting the program expire (or better yet, punishing the FDIC for its illegal behavior), Section 343 of the Dodd-Frank Act extends TAG until January 1, 2013. But as the Federal Reserve Bank of St. Louis points out out, “The TAG program has lost money because current premiums have not covered the losses the FDIC has incurred when a bank fails and the agency has to pay out deposits in excess of the $250,000 coverage limit.”
Despite the losses, the banking industry is lobbying for the extension of TAG. If we are ever to restore market discipline to the banking industry and end the bailouts, Congress would be wise to let TAG expire.