The Senate on Tuesday began considering proposed legislation to extend for two years a Great Recession program that provides open-ended government insurance backing for certain non-interest-bearing bank accounts.
The 76-20 Senate vote to consider the bill to extend the Transaction Account Guarantee program was a victory for community banks who say ending the deposit insurance program could lead to a flight of money from smaller, more vulnerable, banks to the too-big-to-fail megabanks.
Conservative groups, and credit unions seeking greater equality with banks, oppose the legislation. They say the program, put in place in October 2008 to stop a possible run on banks, has outlived its usefulness. Their position may prevail in the end: even if the bill makes it through the Senate it faces opposition in the Republican-controlled House.
The program, revised and renewed in the 2010 Dodd-Frank financial overhaul act, changes the $250,000 limit for federally backed insurance that applies to other deposit accounts, making that insurance coverage unlimited for the non-interest-bearing bank accounts. If the program is allowed to expire at the end of this year, transaction account deposits will revert to that $250,000 limit.
The no-interest accounts are used by businesses, local governments, hospitals and farmers who need a safe place to keep money they use to meet payrolls and other short-term recurring expenses. Critics say that, with interest rates on other bank accounts so low, they also provide the rich with a risk-free place to store money that might otherwise be used for investments.
Senate Banking Committee Chairman Tim Johnson, D-S.D., said 90 percent of community banks with assets under $10 billion have Transaction Account Guarantee deposits and "this program allows these institutions to serve the banking needs of the small businesses in their communities, keeping deposits local."
But the conservative Heritage Action for America, in urging senators to defeat the bill, said the way to level the competition between big and small banks "is not to subsidize smaller banks, but rather to address the problem of too-big-to-fail, which was exacerbated, not fixed, by the Dodd-Frank bill."
The White House, in a statement, said it supported the temporary extension but was committed "to actively evaluating the use of this emergency measure created during extraordinary times and a responsible approach to winding down the program."
As of the end of September, $1.5 trillion was guaranteed in transaction accounts at U.S. banks and thrifts, according to Federal Deposit Insurance Corp. data.
Camden R. Fine, president and CEO of the Independent Community Bankers of America, issued a statement saying failure to extend the program would result in much of that $1.5 trillion abruptly becoming uninsured. "This will be a destabilizing blow to Main Street financial institutions and the communities they serve."
But opponents, including the top Republican on the Senate Banking Committee, Richard Shelby of Alabama, say it is no longer necessary to expose taxpayers to potentially massive losses.
The program has cost the FDIC almost $2.5 billion, although supporters argue that those losses are covered by insurance premiums banks pay the FDIC. "No taxpayer is on the hook for this insurance," Johnson said.
Megan Whittemore, spokeswoman for House Majority Leader Eric Cantor, R-Va., said the program was intended to be a temporary measure during the height of the financial crisis and that "the majority leader believes we should not continue to extend these guarantees and therefore opposes the proposal."
The measure is also opposed by the Credit Union National Association, which ran ads saying "the banks have their hands out again." The credit union has said an extension of the program should be accompanied by legislation that would allow credit unions to expand lending to their business members.