A federal program giving unlimited insurance guarantees to some no-interest bank accounts, enacted at the height of the financial meltdown, will die out at the end of the year following defeat of a Senate plan to extend it.
Senate Majority Leader Harry Reid, D-Nev., led efforts to add two more years to the life of the Transaction Account Guarantee program, but Republican opponents used a procedural vote on the bill's budgetary impact to effectively kill it.
Non-interest-bearing transaction accounts are used by businesses, local governments, hospitals and farmers who need a safe place to keep money on a short-term basis for such recurring expenses as payrolls. Critics of open-ended government backing of the program say the accounts have also become a haven for the wealthy and a deterrent to people investing in more risky job-creating enterprises.
With the measure's demise, federally backed insurance for so-called TAG accounts will revert back to the $250,000 level that applies to most other bank accounts. The increased insurance protection was put in place in October 2008 as the financial crisis raised fears of a run on banks. It was revised and renewed in the 2010 Dodd-Frank financial overhaul act.
At the end of September, about $1.5 trillion was guaranteed in transaction accounts at U.S. banks and thrifts, according to the Federal Deposit Insurance Corp.
The two-year extension was pushed by smaller community banks that argued that the financial recovery is still fragile and that the shrinking of federal protections would result in depositors moving their money to big banks that are less vulnerable to future financial downturns.
The extension was opposed by credit unions seeking the same advantages as banks and conservative groups who associate the TAG program with the federal bailouts of 2008 and 2009 and say the program is no longer needed.
"We are not in a financial crisis anymore," said Sen. Pat Toomey, R-Pa. "I don't understand how you can justify it now." Republicans were also upset that Reid used tactics to keep them from amending the bill.
The administration gave qualified support to the bill. In July, Treasury Secretary Timothy Geithner, asked about the program at a Senate Banking Committee hearing, said that "our judgment so far has been it's not necessary to extend it." The White House, in a statement issued Tuesday, said it supported the bill but was re-evaluating "the use of this emergency measure created during extraordinary times and a responsible approach to winding down the program."
The bill failed after Republicans, led by Toomey, said it did not meet a requirement that legislation not add to the federal deficit. The vote to waive that requirement was 50-42, well short of the 60 needed. Opponents said the TAG program had cost the FDIC almost $2.5 billion, although supporters argued that those losses are covered by insurance premiums banks pay the FDIC.
Even with Senate passage, the legislation would likely have gone nowhere in the Republican-led House. House Majority Leader Eric Cantor, R-Va., had voiced opposition, and the conservative Heritage Action for America group, the policy advocacy arm of the Heritage Foundation, had urged lawmakers to oppose the bill and warned lawmakers they would be rated based on how they voted. The group said the problems associated with too-big-to-fail banks should not be addressed by subsidizing smaller banks.
The Independent Community Bankers of America had warned that failure to extend the TAG program would destabilize smaller community banks and lead to a concentration of funds in a small number of mega-institutions.
Frank Keating, president and CEO of the American Bankers Association, said millions of small businesses and municipal depositors would have valued the continuation of the TAG program and the ABA was disappointed in the Senate vote. But the Republican former Oklahoma governor said banks "have already been communicating about the possible expiration of TAG and will work with their business customers to demonstrate the safety of their deposits."