Small Banks, Big Checking, and the FDIC Pull Back
To understate it grotesquely, the banking system has been experiencing a period of change over the past year or so. Smart depositors have been watching these changes and trying to discover what, if anything, they mean for them and their money.
One broad and continuing area of adjustment is the balance of power between huge, multinational banks such as JPMorgan, Bank of America, and Citigroup, and smaller, community-based banks.
Some smaller banks have done very well during this tumultuous period. However, other smaller banks--perhaps the majority--are facing serious challenges. The retention and acquisition of checking accounts has been a key strategy fueling the survival of smaller, community-based banks.
On December 31, 2009, the FDIC is scheduled to end an insurance program called "Transaction Account Guarantee," or TAG, that insures so-called "big checking" accounts.
Without TAG, will smaller banks face an exodus of big checking customers?
By All Measures, TAG a Smashing Success
It is fashionable now to say the government did too much to help the banks, but in September of 2008, it looked for a moment like financial Armaggeddon was upon us. Then the government stepped in with the acronyms and the cash--TARP, TALF, PPIP, and the rest--and the end of the banking system was averted.
The Transaction Account Guarantee program, or TAG, is among the best moves made by the government.
TAG provides unlimited FDIC insurance on so-called "big checking" accounts, such as those used by companies and government agencies to meet payroll and ongoing expenses. Big checking accounts do not pay interest, but do provide smaller banks with a helpful base of low-cost deposits.
TAG insurance is in addition to the regular FDIC insurance of $250,000 per depositor per account. If a business owner has a $250,000 money market account at a bank, for example, as well as a $250,000 big checking account, all the money is covered by the FDIC.
Currently, $700 billion worth of big checking accounts are insured.
Can Big Checking Trust Smaller Banks?
TAG is slated to expire at the end of 2009. Does that mean big checking accounts will begin exiting smaller banks in droves for the perceived security of, say, JPMorgan?
If such an exodus does occur, big banks could be the big winners, and community-based banks could be the small losers. TAG has enabled smaller banks to offer big checking clients unlimited assurance that the money will be there, no matter what.
Now that assurance is going away. Municipalities, for example, often like to keep their money at a smaller, community-based bank. It's good PR. But without the backing of the FDIC, will municipalities think keeping such large sums at smaller banks too risky?
That the FDIC would need programs like TAG to end soon is easily understandable. The FDIC has seen its own coffers depleted, with $3.7 billion going to banks in the second quarter of 2009.
The FDIC is pulling back. Small banks must get ready to stand on their own.
Colin Barr • Kicking the Bailout Habit • Aug 26, 2009 • CNN Money: http://money.cnn.com/2009/08/25/news/fdic.guarantees.fortune/index.htm?postversion=2009082608
First Citizens Bank: http://www.first-citizens.com/TAGPFAQ.pdf