Community banks fear return of insurance cap

Big institutions will get an edge, small rivals say

WASHINGTON — To prevent a possible run on banks in the depths of the financial crisis four years ago, Congress expanded government insurance for certain bank deposits to include totals above the usual $250,000 limit. Now that the ceiling is about to be reimposed, community banks fear they will lose customers to bigger banks and want Congress to come to their rescue.

They are opposed by conservative groups, among others, who say the Transaction Account Guarantee program is no longer needed and discourages the wealthy from investing in the economy.

Noninterest-bearing transaction accounts are used by businesses, local governments, hospitals, and farmers who need a safe place to keep money they use to meet payrolls and for other short-term operating expenses. In October 2008, the Federal Deposit Insurance Corp. created the TAG program, providing unlimited insurance coverage for such accounts, to prevent a sudden withdrawal of deposits. The program was revised and extended as part of the 2010 Dodd-Frank financial overhaul act.


The program expires at the end of this year and Senate legislation to extend it for another two years, sponsored by Senate Majority Leader Harry Reid, comes up for a test vote on Tuesday. Even if it gets the 60 votes needed to stay alive, Senate passage is uncertain.

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The legislation also faces opposition in the GOP-controlled House.

The ceiling for insurance coverage will revert to $250,000 if the program is allowed to expire.

Independent Community Bankers of America and others seeking an extension say that if Congress fails to act, it would result in nearly $1.5 trillion in TAG deposits suddenly becoming uninsured. They warn that would destabilize smaller financial institutions because depositors would shift their funds to big banks, believing them to be safer.

Community bankers dispute claims made by the program’s opponents that it has cost the FDIC almost $2.5 billion. While they acknowledge the program increases bank-failure-related expenses by about 3 percent, they argue those losses are covered by insurance premiums that banks pay the FDIC.


But 14 conservative and free-market groups, in a letter to Senate leaders, said the TAG program ‘‘both places unlimited liability on taxpayers for bank and credit union deposits and subsidizes the ability of the wealthy to ‘park their money’ in ways that are unproductive for the economy.’’

Megan Whittemore, spokeswoman for House Majority Leader Eric Cantor, Republican of Virginia, said the program was intended to be temporary.

The measure is also opposed by the Credit Union National Association, which ran ads saying ‘‘banks have their hands out again.’’ The group has said an extension should be accompanied by legislation that would allow credit unions to expand lending to their business members.