Tuesday, April 13, 2010

FDIC Approves Extension of Transaction Account Guarantee

FDIC’s decision today to extend the Transaction Account Guarantee Program (TAG) - which offers unlimited deposit insurance on non-interest bearing accounts – for an additional six months was wise.

The TAG program has provided stability and confidence for many bank depositors. Nearly 6,400 banks continue to participate in TAG, which is insuring $266 billion that would otherwise not be covered under regular deposit insurance rules.

However, economic conditions remain very unsettled and it is as important as ever to assure depositors that their money is safe. The need for stable sources of funding is critical and extending the TAG program helps avoid liquidity problems that may otherwise make it very difficult for some banks to continue their operations without significantly reducing lending and other services they provide to their local communities.

The FDIC shares this sentiment, stating in their memo, “Staff is concerned that allowing the TAG program to expire in the current environment could cause a number of community banks to experience deposit withdrawals from their large transaction accounts and risk needless liquidity failures.”

Under the interim rule:

1. The program is extended from July 1, 2010 to Dec. 31, 2010.

2. The board may extend the program an additional year without additional rulemaking, but it would have to make such a determination by Oct. 29.

3. Banks that wish to opt out must do so by April 30. No additional opt-out would be offered later even if the program is extended an additional year.

4. The maximum interest rate for qualifying as a NOW account under the rule is 0.25%, down from 0.50%.

The exit strategy for this program should be one that relies on flexible planning to minimize market disruption once the markets have returned to normal. Since many local economies have not yet normalized, flexible planning is even more important and argues for extension of the TAG program.

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